Question

In preparing its consolidated financial statements at December 31, 20X7, the following consolidation entries were included in the consolidation worksheet of Powder Corporation:

Consolidation Worksheet Entries	Debit	Credit
Buildings	140,000
Gain on Sale of Building	28,000
Accumulated Depreciation		168,000

Consolidation Worksheet Entries	Debit	Credit
Accumulated Depreciation	2,000
Depreciation Expense		2,000

Powder owns 60 percent of Snow Corporation’s voting common stock. On January 1, 20X7, Snow sold Powder a building it had purchased for $635,000 on January 1, 20X1, and depreciated on a 20-year straight-line basis. Powder recorded depreciation for 20X7 using straight-line depreciation and the same useful life and residual value as Snow.

Required:
a. What amount did Powder pay Snow for the building?

b. What amount of accumulated depreciation did Snow report at January 1, 20X7, prior to the sale?

c. What annual depreciation expense did Snow record prior to the sale?

d. What expected residual value did Snow use in computing its annual depreciation expense?

e. What amount of depreciation expense did Powder record in 20X7?

f. If Snow reported net income of $80,000 for 20X7, what amount of income will be assigned to the noncontrolling interest in the consolidated income statement for 20X7?

g. If Snow reported net income of $61,000 for 20X8, what amount of income will be assigned to the noncontrolling interest in the consolidated income statement for 20X8?

Answer 1

Solution-

a) Powder paid snow for the Building   =   Purchase price (-) Accumulated Dep. On Building                                                                                 =     $635,000 (-) $140,000                                                                                 =   $495,000
Powder paid snow for the Building	$495,000
b)
Accumulated Depreciation snow report at january 1,20X7 prior to date
Particulars	Amount (in $)
(1) Purchase price	$635,000
Amount paid	$495,000
Gain recorded by Sale	($28,000)
(2) Book value on the date of sale	$467,000
Accumulated depreciation on the date of Sale [(1) - (2)]	$168,000
Accumulated depreciation	$168,000

C)-

Annual depreciation expense = $28,000(168,000/6 year)

d)-

Expected Residual value

Purchase price paid by Rakel	$635,000
Amount to be depreciated by Rakel (28,000*20)	$560,000
Expected residual value	$75,000

e.

Depreciation Expense of Master = (Purchase Price – Residual Value) / Remaining Life of Asset

= ($495,000– 75,000) / (20 – 6 Years)

=$420,000/14Years

Depreciation Expense of Master = $30,000Per year

f.

Gain on Sale of Building = $28,000– 2,000

= $26,000

Non-Controlling Interest Income =( Income – Gain on Sale of Building) * Non-Controlling Interest

= ($80,000- $26,000) * (100 – 60%)

Non-Controlling Interest Income = $21,600

g.

In 20X8 we will recognize the remaining Gain of $2,500 on Sale of Building

Non-Controlling Interest Income = (Income + gain released) * Non-Controlling Interest

= ($61,000+ 2,000) * 40%

Non-Controlling Interest Income = $25,200