Question

The individual financial statements for Gibson Company and Keller Company for the year ending December 31, 2018, follow. Gibson acquired a 60 percent interest in Keller on January 1, 2017, in exchange for various considerations totaling $600,000. At the acquisition date, the fair value of the noncontrolling interest was $400,000 and Keller’s book value was $800,000. Keller had developed internally a customer list that was not recorded on its books but had an acquisition-date fair value of $200,000. This intangible asset is being amortized over 20 years.

Gibson sold Keller land with a book value of $50,000 on January 2, 2017, for $110,000. Keller still holds this land at the end of the current year.

Keller regularly transfers inventory to Gibson. In 2017, it shipped inventory costing $175,000 to Gibson at a price of $250,000. During 2018, intra-entity shipments totaled $300,000, although the original cost to Keller was only $195,000. In each of these years, 20 percent of the merchandise was not resold to outside parties until the period following the transfer. Gibson owes Keller $55,000 at the end of 2018.

	Gibson Company				Keller Company
Sales	$	(900,000	)		$	(600,000	)
Cost of goods sold		600,000				400,000
Operating expenses		200,000				75,000
Equity in earnings of Keller		(75,000	)			0
Net income	$	(175,000	)		$	(125,000	)
Retained earnings, 1/1/18	$	(1,216,000	)		$	(670,000	)
Net income (above)		(175,000	)			(125,000	)
Dividends declared		120,000				75,000
Retained earnings, 12/31/18	$	(1,271,000	)		$	(720,000	)
Cash	$	179,000			$	60,000
Accounts receivable		376,000				510,000
Inventory		490,000				420,000
Investment in Keller		864,000				0
Land		210,000				490,000
Buildings and equipment (net)		506,000				400,000
Total assets	$	2,625,000			$	1,880,000
Liabilities	$	(664,000	)		$	(640,000	)
Common stock		(690,000	)			(420,000	)
Additional paid-in capital		0				(100,000	)
Retained earnings, 12/31/18		(1,271,000	)			(720,000	)
Total liabilities and equities	$	(2,625,000	)		$	(1,880,000	)

(Note: Parentheses indicate a credit balance.)

1. Prepare a worksheet to consolidate the separate 2018 financial statements for Gibson and Keller.

2. How would the consolidation entries in requirement (a) have differed if Gibson had sold a building with a $110,000 book value (cost of $240,000) to Keller for $200,000 instead of land, as the problem reports? Assume that the building had a 10-year remaining life at the date of transfer.

Answer 1

We start off with this problem by looking at the acquisition information. Gibson purchases 60% of Keller. The 60% represents 570,000 in dollar value. The non-controlling interest (the other 40%) has a fair value of 380,000. So, total fair market value of Keller is 950,000 (570,000 + 380,000). The book value of Keller is 850,000, thus the fair value over book value is 100,000. However, they tell us that there is a customer list worth 100,000 that was not included on the books. So if we assume that this would have been on the books, then the adjusted fair value over book value would be zero. The customer list is amortized over 20 years. Therefore, 100,000 divided by 20 comes out to 5,000 per year.

The next section of the worksheet gets into the consolidation entries and most of them will be similar to those in problem 32. The first one that we look at is the land transaction. Gibson sold Keller some land with a book value of 60,000 for 100,000, which Keller still holds. So Gibson would have recorded that 40,000 difference as a gain, which needs to be eliminated. We reduce retained earnings through a debit to remove the gain, and we also reduce the value of the land by 40,000 to bring it back down to the 60,000 value.

Entry TL

Debit: Retained Earnings 40,000

Credit: Land 40,000

On Problem 32 we made adjustments for gross profits from the transfer of inventory. We will do that again in this problem. First, we are going to determine how much was deferred in 2012 that we will now recognize in 2013. In the third paragraph they give us the information we need. In 2012, Keller transferred inventory that cost 100,000 for a price of 150,000. So the gross profit rate that we are going to use for 2012 is 33.3% (50,000 gross profit divided by sale price of 150,000). The also tell us that 20% of the merchandise was not resold to outside parties. So in 2012, Gibson purchased 150,000 and retained 20% of that, which is 30,000. We then apply the gross profit rate of 33.3% to that 30,000 to show how much gross profit (it comes out to 10,000) that was deferred in 2012 that we can now recognize in 2012. The entry will be a debit to retained earnings and a credit to cost of goods sold.

Entry *G

Debit: Retained Earnings 10,000 ç 30,000 X 33.3%

Credit: COGS 10,000

We can also calculate the deferred gross profit for 2013. The price of the inventory for 2013 that was transferred to Gibson was 200,000 at a cost of 140,000. Therefore, the gross profit rate is 30% (60,000 gross profits divided by 200,000 sales price). If we take 20% of that sales price of 200,000, we come up with 40,000 that remain unsold to outside parties. We then take that 30% gross profit rate times the 40,000, and determine that 12,000 needs to be deferred. The deferral of the gross profit is reflected by debiting cost of goods sold and crediting inventory for the 12,000

Entry G

Debit: COGS 12,000

Credit: Inventory 12,000

We now have to reflect the adjusted amounts of the parents beginning retained earnings. This is determined from the sum of the adjusted amortization of the customer list and the parent’s ownership percentage of the subsidiary’s beginning retained earnings. We determined the amortization to be 5,000 per year. The sub’s beginning retained earnings is 10,000 based on the calculation derived in Entry *G. So, we take the 10,000 plus the 5,000 to get 15,000 and then take 60% of that, which comes out to 9,000.

Entry *C

Debit: Retained Earnings, 1/1/13 9,000

Credit: Investment in Keller 9,000

Just like in problem 32, we have to make an elimination entry for the stockholders equity accounts of the subsidiary company. Keller has common stock of 320,000, additional paid in capital of 90,000 and a beginning retained earnings of 610,000 (620,000 adjusted for the 10,000). Again, we have to use the beginning retained earnings because the ending retained earnings factors in net income and dividends, which we will make individual eliminations. These equity accounts are against the investment in sub, but only based on the 60% ownership interest.

Entry S

Debit: Common Stock 320,000

Debit: APIC 90,000

Debit: Retained Earnings, 1/1/13 610,000 (not 620,000 because we already debit 10,000)

Credit: Investment in Keller 612,000 (sum of debits times 60%)

Credit: Non-Controlling Interest 408,000 (sum of debits times 40%)

We need to show on the books the value of the customer list at the beginning of 2013. Since the acquisition was at the beginning of 2012, there should have been a 5,000 amortization recognized in 2012. So, the true value of the customer list at the beginning of 2013 is 95,000 (100,000 less 5,000). This elimination is a debit to the customer list and a credit to investment in Keller for 60% and a credit to non-controlling interest for the other 40%.

Entry A

Debit: Customer List 95,000

Credit: Investment in Keller 57,000 ç 95,000 times 60%

Credit: Non-Controlling Interest 38,000 ç 95,000 times 40%

Now that we recorded the value as of beginning of 2013, we can recognize the 5,000 amortization for 2013.

Entry E

Debit: Amortization Expense 5,000

Credit: Customer List 5,000

Just like in problem 32, we have to do an elimination entry for the income that Gibson shows from Keller. Gibson’s income statement shows 84,000 in income from Keller.

Entry I

Debit: Income of Keller 84,000

Credit: Investment in Keller 84,000

Keller paid 60,000 in dividends of which 60% went to Gibson. Those have to be eliminated. The remaining 40% went to the non-controlling interest.

Entry D

Debit: Investment in Keller 36,000 ç 60,000 dividend times 60%

Credit: Dividends Paid 36,000

The last sentence of the third paragraph indicates that Gibson owes Keller 40,000. This would show up as an Accounts Receivable to Keller and a liability to Gibson. So, we have to eliminate that transaction.

Entry P

Debit: Liabilities 40,000

Credit: Accounts Receivable 40,000

We have not yet eliminated the revenue line item for the 200,000 in sales to Gibson. We have made adjustments for the gross profit in entry G and *G though.

Entry TI

Debit: Sales 200,000

Credit: COGS 200,000

The last piece of information that we would want to know before completing the worksheet is the adjusted net income for 2013 that the non-controlling interest takes ownership. This is similar to what we did in part A of problem 32.

Keller Company Net Income 140,000

Adjustment for Amortization (5,000)

2012 gross Profit recognized 10,000

2013 gross profit deferred (12,000)

Adjusted net income 2013 133,000

Non-controlling interest 53,200 (133,000 times 40%)

This 53,200 will be shown on the worksheet as consolidated net income to non-controlling interest

.