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Pond Corporation holds 75 percent of the voting shares of Spring Services Company. During 20X7, Pond...

Pond Corporation holds 75 percent of the voting shares of Spring Services Company. During 20X7, Pond sold inventory costing $63,000 to Spring Services for $105,000, and Spring Services resold one-third of the inventory in 20X7. The remaining inventory was resold in 20X8. Also in 20X7, Spring Services sold land with a book value of $140,000 to Pond for $240,000. Pond continues to hold the land at the end of 20X8. The companies file separate tax returns and are subject to a 40 percent tax rate.

Required:
Prepare the consolidation entries relating to the intercorporate sale of inventories and land needed in the consolidation worksheet at the end of 20X8. Assume that Pond uses the equity method in accounting for its investment in Spring Services.

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Expert Solution

An associate company (or associate) in accounting and business valuation is a company in which another company owns a significant portion of voting shares, usually 20–50%. In this case, an owner does not consolidate the associate's financial statements. Ownership of over 50% creates a subsidiary, with its financial statements being consolidated into the parent's books.

Therefore, in given case Spring Services Company is the subsidiary of Pond Corporation Ltd. However, it is specifically mentioned in the question that Pond follows Equity method of accounting:

As per Equity method: Value of Investment is calculated on the basis of proportionate value of   of net assets of the investee. The difference in the value of investment & value of net assets is adjusted in Capital Reserve or Goodwill.

Therefore, any unrealised profit or loss through inter corporate transaction should be adjusted in Capital reserve or Goodwill.

For consolidation entries for year 2018:

Goods purchased by Pond from Spring:                                   $105000

Cost of goods to Spring                                                              $63000

Total Unrealised profit                                                                $42000

Unrealised profit to be removed from Opening inventory of 2018 or same can be removed from the Profit & Loss for the year:

Unrealised Profit ($42000 x 2/3) DR.                       $28000

               To. Profit / Loss Account                              $28000

For total unrealised profit:

Capital Reserve/ Goodwill. DR.                                  $42000

               To. Unrealised Profit                                     $42000

For unrealised profit on 1/3rd sale of goods in Year 2017. The same will be included in General reserves of the Pond Corporation (where last year Profit / Loss will be adjusted)

Unrealised Profit ($42000 x 1/3) DR.                         $14000

               To. General Reserves                                     $14000

Unrealised Profit included in Asset:

Capital Reserve/ Goodwill. DR.                                 $100000

               To. Unrealised Profit                                     $100000

Unrealised Profit DR.                                                    $100000

               To. Land (in assets)                                        $100000

ekkarill92 answered 2 hours ago
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