Question

In: Accounting

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.

Solutions

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 3 months ago
Next > < Previous

Related Solutions

ABC Corporation owns 75 percent of XYZ Company's voting shares. During 20X8, ABC produced 50,000 chairs...
ABC Corporation owns 75 percent of XYZ Company's voting shares. During 20X8, ABC produced 50,000 chairs at a cost of $79 each and sold 35,000 chairs to XYZ for $90 each. XYZ sold 18,000 of the chairs to unaffiliated companies for $117 each prior to December 31, 20X8, and sold the remainder in early 20X9 to unaffiliated companies for $130 each. Both companies use perpetual inventory systems. 10. Required information Based on the information given above, what amount of cost...
Light Corporation owns 80 percent of Sound Company's voting shares. On January 1, 20X7, Sound sold...
Light Corporation owns 80 percent of Sound Company's voting shares. On January 1, 20X7, Sound sold bonds with a par value of $300,000 when the market rate was 7 percent. Light purchased two thirds of the bonds; the remainder was sold to nonaffiliates. The bonds mature in ten years and pay an annual interest rate of 6 percent. Interest is paid semiannually on June 30 and Dec 31. 1. Based on the information given above, what amount of interest expense...
Light Corporation owns 80 percent of Sound Company's voting shares. On January 1, 20X7, Sound sold...
Light Corporation owns 80 percent of Sound Company's voting shares. On January 1, 20X7, Sound sold bonds with a par value of $300,000 when the market rate was 7 percent. Light purchased two thirds of the bonds; the remainder was sold to nonaffiliates. The bonds mature in ten years and pay an annual interest rate of 6 percent. Interest is paid semiannually on June 30 and Dec 31. Based on the information given above, what amount of interest expense should...
Poison Corporation holds 70 percent of Snake Company’s voting common shares but none of its preferred...
Poison Corporation holds 70 percent of Snake Company’s voting common shares but none of its preferred shares. Summary balance sheets for the companies on December 31, 20X1, are as follows: Poison Corporation Snake Company Assets Cash $ 20,000 $ 29,000 Accounts Receivable 32,000 42,000 Inventory 120,000 74,000 Buildings and Equipment 295,000 215,000 Less: Accumulated Depreciation (138,000 ) (63,000 ) Investment in Snake Company 123,900 Total Assets $ 452,900 $ 297,000 Liabilities and Owners’ Equity Accounts Payable $ 77,900 $ 64,000...
Plexis Corporation holds 70 percent of Solar Company's voting common shares, acquired at book value, but...
Plexis Corporation holds 70 percent of Solar Company's voting common shares, acquired at book value, but none of its preferred shares. At the date of acquisition, the fair value of the noncontrolling interest was equal to 30 percent of the book value of Solar Company. Summary balance sheets for the companies on December 31, 20X5, are as follows: Plexis Corp. Solar Company Cash and Receivables $ 70,000 $ 55,000 Inventory 60,000 35,000 Buildings and Equipment (net) 180,000 160,000 Investment in...
Fred Corporation owns 75 percent of Winner Company's voting shares, acquired on March 21, 20X5, at...
Fred Corporation owns 75 percent of Winner Company's voting shares, acquired on March 21, 20X5, at book value. At that date, the fair value of the noncontrolling interest was equal to 25 percent of the book value of Winner Company. On January 1, 20X4, Fred paid $150,000 for equipment with a 10-year expected total economic life. The equipment was depreciated on a straight-line basis with no residual value. Winner purchased the equipment from Fred on December 31, 20X6, for $140,000....
Apple Corporation holds 60 percent of Shortway Publishing Company’s voting shares. Apple issued $590,000 of 12...
Apple Corporation holds 60 percent of Shortway Publishing Company’s voting shares. Apple issued $590,000 of 12 percent bonds with a 10-year maturity on January 1, 20X2, at 92. On January 1, 20X8, Shortway purchased $118,000 of the Apple bonds for $124,000. Partial trial balances for the two companies on December 31, 20X8, are as follows: Note: Assume using straight-line amortization of bond discount or premium. Apple Corporation Shortway Publishing Company   Investment in Shortway Publishing Company Stock $ 134,000   Investment in...
Par Corporation holds 60 percent of Short Publishing Company’s voting shares. Par issued $500,000 of 10...
Par Corporation holds 60 percent of Short Publishing Company’s voting shares. Par issued $500,000 of 10 percent (paid semiannually) bonds with a 10-year maturity on January 1, 20X2, at 90. On January 1, 20X8, Short purchased $100,000 of the Par bonds for $106,000. Partial trial balances for the two companies on December 31, 20X8, are as follows: Par Corporation Short Publishing Company Investment in Short Publishing Company Stock $ 141,000 Investment in Par Corporation Bonds $ 104,676 Bonds Payable 500,000...
Parent Company holds 85 percent of Surrogate Company’s voting common shares. On December 31, 20X8, Parent...
Parent Company holds 85 percent of Surrogate Company’s voting common shares. On December 31, 20X8, Parent recorded a loss of $14,000 on the sale of equipment to Surrogate. At the time of the sale, the equipment’s estimated remaining economic life was eight years. Required: a. Will consolidated net income be increased or decreased when consolidation entries associated with the sale of equipment are made at December 31, 20X8? By what amount? b. Will consolidated net income be increased or decreased...
Planet Corporation acquired 90 percent of Saturn Company’s voting shares of stock in 20X1. During 20X4,...
Planet Corporation acquired 90 percent of Saturn Company’s voting shares of stock in 20X1. During 20X4, Planet purchased 57,000 Playday doghouses for $20 each and sold 42,000 of them to Saturn for $25 each. Saturn sold 35,000 of the doghouses to retail establishments prior to December 31, 20X4, for $40 each. Both companies use perpetual inventory systems. Required: a. Prepare all journal entries Planet recorded for the purchase of inventory and resale to Saturn Company in 20X4. (If no entry...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT