Problem - On January 1, 20X1, Parent Company acquired 100% of the common stock of Subsidiary Company for $365,000. On this date, Subsidiary had common stock, other paid in capital, and retained earnings of $50,000, $100,000, and $200,000 respectively. Any excess of cost over book value is due to goodwill. Parent uses the simple equity method to account for its investment in subsidiary.
On January 1, 20X2, Parent purchased equipment for $174,120 and immediately leased the equipment to Subsidiary on a 4-year lease. The transaction was legally structured as a sales-type lease with a present value for the minimum lease payments of $204,120. Parent recorded the following entry:
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Minimum Lease Payments Receivable
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240,000
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Unearned Interest Income
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35,880
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Equipment
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174,120
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Sales Profit on Lease
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30,000
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The minimum lease payments of $60,000 are to be made annually on January 1, beginning immediately, for a total of 4 payments. The implicit interest rate is 12%. The lease provides for an automatic transfer of title at the end of 4 years. The estimated useful life of the equipment is 6 years. The lease has been capitalized by both companies.
A lease amortization schedule, applicable to either company, is presented below:
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Carrying Value on
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Carrying Value
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Interest Rate
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Interest
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Payment
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Principal Reduction
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1-1-X2
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$204,120
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- 60,000
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1-1-X2
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144,120
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12%
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$17,294
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$60,000
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$42,706
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- 42,706
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1-1-X3
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101,414
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12%
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12,170
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60,000
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47,830
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- 47,830
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1-1-X4
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53,584
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12%
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6,416*
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60,000
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53,584
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- 53,584
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1-1-X5
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$ 0
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*Adjusted for rounding error.
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Required: Complete the following worksheet for consolidated financial statements for the year ended December 31, 20X2. Round all computations to the nearest dollar.
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Trial Balance
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Eliminations and
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Consol.
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Control.
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Consol.
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Parent
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Sub.
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Adjustments
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Income
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Retained
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Balance
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Account Titles
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Company
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Company
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Debit
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Credit
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Statement
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NCI
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Earnings
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Sheet
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Current Assets
|
190,366
|
211,314
|
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Min. Lease Payments Rec.
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180,000
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Unearned Interest Income
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-18,586
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|
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Investment in Sub. Company
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475,000
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Land
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100,000
|
60,000
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Buildings and Equipment
|
350,000
|
300,000
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Accumulated Depreciation
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-100,000
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-50,000
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Equipment under Cap. Lease
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204,120
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Acc. Depr. - Eq. Cap. Lease
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-34,020
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Goodwill
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|
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Current Liabilities
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-120,000
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-60,000
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Obligation under Cap. Lease
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-144,120
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Interest Payable on Lease
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-17,294
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Other Long-Term Liabilities
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-200,000
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-10,000
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Common Stock - P Co.
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-200,000
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Other Paid-in Capital - P Co.
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-100,000
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Retained Earnings - P Co.
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-466,780
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Common Stock - S Co.
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-50,000
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Other Paid-in Capital - S Co.
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-100,000
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Retained Earnings - S Co.
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-250,000
|
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Net Sales
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-470,000
|
-300,000
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|
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Cost of Goods Sold
|
317,294
|
180,000
|
|
|
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Operating & Other Expenses
|
120,000
|
42,706
|
|
|
|
|
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Interest Income on Lease
|
-17,294
|
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Interest Expense on Lease
|
|
17,294
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Sales Profit on Lease
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-30,000
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Subsidiary Income
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-60,000
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Dividends Declared - P Co.
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50,000
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Consolidated Net Income
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To NCI
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To Controlling Interest
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Total NCI
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Ret. Earn. Contr. Int. 12-31
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0
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0
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