Question

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Baywatch Industries has owned 80 percent of Tubberware Corporation for many years. On January 1, 20X6,...

Baywatch Industries has owned 80 percent of Tubberware Corporation for many years. On January 1, 20X6, Baywatch paid Tubberware $222,000 to acquire equipment that Tubberware had purchased on January 1, 20X3, for $252,000. The equipment is expected to have no scrap value and is depreciated over a 15-year useful life.

      Baywatch reported operating earnings of $100,000 for 20X8 and paid dividends of $45,000. Tubberware reported net income of $41,000 and paid dividends of $22,000 in 20X8.

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.

    

Solutions

Expert Solution

a)
Operating Income $ 1,00,000.00
Baywatch's share of Tubberware's realized income ($41000 + $1700) x 80% $    34,160.00
Consolidated Net Income $ 1,34,160.00
*Gain realized each year = differential depreciation = credit (gain realized)
Baywatch's Depreciation = $252,000/15 years $    16,800.00
Tupperware's Depreciation = $222,000/12 years $    18,500.00
Gain Realized $    -1,700.00
b)
Baywatch's Separate operating income realized = $100000 + 1700 $ 1,01,700.00
Baywatch share of tubberware income ($41,000*80%) $    32,800.00
Consolidated Net Income $ 1,34,500.00
Consolidated net income would be $340 greater since the realized gain is entirely allocated to the parent (in (a).
c)
Account Titles Debit Credit
Retained Earnings ($20400 - 1700 x 2) = $7000 x 80% $    13,600.00
Non Controlling Interest =17000 x 20% $      3,400.00
Equipment ($252,000 - $222000) $    30,000.00
                Depreciation $   1,700.00
                Accumulated Depreciation (16,800 x 6 yrs)-(18,500 x 3yrs) $ 45,300.00
Retained Earnings
Book value of equipment in 2006 = $252000 - $16800 x 3 $ 2,01,600.00
Less: Purchased price paid by baywatch 2,22,000
Gain on sale $ -20,400.00

ekkarill92 answered 1 year ago
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