Question

Photo Industries has owned 80 percent of Shutter Corporation for many years. On January 1, 20X6, Photo paid Shutter $243,000 to acquire equipment that Shutter had purchased on January 1, 20X3, for $261,000. The equipment is expected to have no scrap value and is depreciated over a 15-year useful life.
Photo reported operating earnings of $100,000 for 20X8 and paid dividends of $40,000. Shutter reported net income of $44,000 and paid dividends of $23,000 in 20X8. (Leave no cell blank, enter "0" wherever required.)

Required:
a. Compute the amount reported as consolidated net income for 20X8.

b. By what amount would consolidated net income change if the equipment sale had been a downstream sale rather than an upstream sale?

c. Prepare the consolidation entry or entries required to eliminate the effects of the intercompany sale of equipment in preparing a full set of consolidated financial statements at December 31, 20X8. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Post Delivery Service acquired at book value 80 percent of the voting shares of Script Real Estate Company. On that date, the fair value of the noncontrolling interest was equal to 20 percent of Script’s book value. Script Real Estate reported common stock of $300,000 and retained earnings of $105,000. During 20X3, Post Delivery provided courier services for Script Real Estate in the amount of $23,000. Also during 20X3, Script Real Estate purchased land for $5,000. It sold the land to Post Delivery Service for $26,000 so that Post Delivery could build a new transportation center. Post Delivery reported $59,000 of operating income from its delivery operations in 20X3. Script Real Estate reported net income of $69,000 and paid dividends of $10,500 in 20X3.

Required:
a. Compute consolidated net income for 20X3.

Answer 1

a. 122,750

Working for consolidated income-
Earnings of Photo	100,000
Earnings of Shuttler	44,000
Less: dividend from Shuttler	(18,400)	23000*80%
Less: depreciation recorded for unrealised gain	(2,850)	34,200/12*1
Consolidated net income should be	122,750

Workings for unrealised sale-
Cost of equipment	261,000
Depreciation yrs	15
Life used	3
Depreciation accumulated	52,200
Carrying value	208,800
Sales value	243,000
Unrealised gain recorded	34,200

B. Nil amount as upstream or downstream sale has no consequence in consolidated financials. All the intercompany transactions and unrealised gain is reversed in consol financial statement.

c. Following shall be Journal entry-

Date	Accounts	Debit	Credit
	Retained earnings A/c---Dr	28,500
	To Depreciation A/c		2,850
	To Equipment A/c		25,650
	(Unrealised gain on equipment and excess depreciation reversed in consolidated financial statement)
	Divident Income A/c---Dr To Retained earnings A/c (Being dividend reversed)	18,400	18,400

a. Consolidated net income for 20X3 is-

Working for consolidated income-
operating income of Post Delivery	59,000
operating income of Scipt Real estate	69,000
Less: dividend from Script Real estate	(8,400)
Less: gain on land unrealised	(21,000)
Less: intercompany sales	(23,000)
Consolidated net income	75,600

Note: Assumed services provided for 23,000 has no cost associated with it. If there is any cost, same shall be aded and consolidated net income shall rise.