Question

On January 1, 2016, Monica Company acquired 70 percent of Young Company’s outstanding common stock for $700,000. The fair value of the noncontrolling interest at the acquisition date was $300,000. Young reported stockholders’ equity accounts on that date as follows:

Common stock—$10 par value	$	100,000
Additional paid-in capital		100,000
Retained earnings		520,000

In establishing the acquisition value, Monica appraised Young's assets and ascertained that the accounting records undervalued a building (with a five-year remaining life) by $40,000. Any remaining excess acquisition-date fair value was allocated to a franchise agreement to be amortized over 10 years.

During the subsequent years, Young sold Monica inventory at a 30 percent gross profit rate. Monica consistently resold this merchandise in the year of acquisition or in the period immediately following. Transfers for the three years after this business combination was created amounted to the following:

Year	Transfer Price				Inventory Remaining at Year-End (at transfer price)
2016	$	60,000			$	21,000
2017		80,000				23,000
2018		90,000				29,000

In addition, Monica sold Young several pieces of fully depreciated equipment on January 1, 2017, for $47,000. The equipment had originally cost Monica $72,000. Young plans to depreciate these assets over a 5-year period.

In 2018, Young earns a net income of $250,000 and declares and pays $80,000 in cash dividends. These figures increase the subsidiary's Retained Earnings to a $850,000 balance at the end of 2018.

Monica employs the equity method of accounting. Hence, it reports $160,740 investment income for 2018 with an Investment account balance of $829,510. Under these circumstances, prepare the worksheet entries required for the consolidation of Monica Company and Young Company. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

Answer 1

Calculation of Franchise agreement on aquisition
Consideration transfered by monica to young for 70% of share	700,000
Fairvalue of non controlling interest	300,000
Total fairvalue of young company	1,000,000
Less: Book Value
common stock	(100,000)
Additional paid in capital	(100,000)
Retained earnings	(520,000)
Excess of fair value over book value	280,000
Excess fair value assigned to:
Building	40,000
Franchise agreement (balance)	240,000

Depreciation/Amortisation of excess value of assets aquired

Assets	Value as on 1/1/2016 (A)	Life (in years) (B)	Depreciation per year C=A/B	Value as on 12/31/16 D= A-C	Value as on 12/31/17 E= D-C	Value as on 12/31/18 F= E-C
Building	40,000	5	8,000	32,000	24,000	16,000
Franchise Agreement	240,000	10	24,000	216,000	192,000	168,000
Total	280,000		32,000	248,000	216,000	184,000
Monica Share 70%

Assets	Value as on 1/1/2016 (A)	Life (in years) (B)	Depreciation per year C=A/B	Value as on 12/31/16 D= A-C	Value as on 12/31/17 E= D-C	Value as on 12/31/18 F= E-C
Building	28,000	5	5,600	22,400	16,800	11,200
Franchise Agreement	168,000	10	16,800	151,200	134,400	117,600
Total	196,000		22,400	173,600	151,200	128,800

NCI 30%

Assets	Value as on 1/1/2016 (A)	Life (in years) (B)	Depreciation per year C=A/B	Value as on 12/31/16 D= A-C	Value as on 12/31/17 E= D-C	Value as on 12/31/18 F= E-C
Building	12,000	5	2,400	9,600	7,200	4,800
Franchise Agreement	72,000	10	7,200	64,800	57,600	50,400
Total	84,000		9,600	74,400	64,800	55,200

Calculation of Deffered profit on intra company sale

Inventory transfer (upstream)

Year	Inventory remaining at year end (A)	Profit %(B)	Deffered Profit C=A*B
2017	23,000	30%	6,900
2018	29,000	30%	8,700

Equipment Transfer (Downstream)

Gain on sale of equipment 1/1/17	47000
Life	5
Excess depreciation per Year (47000/5)	9,400

Deffered Gain on Equipment 1/1/18

Gain on sale of equipment 1/1/17	47000
Less: Depreciation per year	9,400
Deffered Gain on Equipment 1/1/18	37,600

Calculation of retained earnings of Young as on 1/1/2018

Retained earnings as on 12/31/2018	850,000
Less: Net income during the year 2018	250,000
Add: Dividend	80,000
Unadjusted Retained earnings as on 1/1/2018	680,000
Less: removal of deffered profit	6,900
Adjusted Retained earnings as on 1/1/2018	673,100

Consolidation Entries

Entry	Account Title and Explanation	Debit	Credit
C	Investment Income	160,740
	Dividend (80,000*70%)		56,000
	Investment in Young		104,740
	(To eliminate the intra company accrual)
S	Equity Share - Young	100,000
	Additional pain in capital - Young	100,000
	Retained Earnings Young (1/1/18)	673,100
	Investment in young (70%)		611,170
	Non controlling interest (30%)		261,930
	(to eliminate equity account of subsidiary and recognise
	non controlling interest)
A	Building	24,000
	Franchise agreement	192,000
	Investment in Young (70%)		151,200
	Non controlling Interest (30%)		64,800
	(to record the unamortised value of excess asset as on 1/1/2017)
D	Amortisation Expense- Franchise agreement	24,000
	Depreciation Expense- Building	8,000
	Franchise agreement		24,000
	Building		8,000
	(to record amortisation and Depreciation expense during the year 2018)
Sales	Sales	90,000
	Cost of Goods Sold		90,000
	(to eliminate intra company inventory transfer during the year 2018)
COGS	Retained Earnings- Young (1/1/18)	6,900
	Cost of Goods sold		6,900
	(to recognise the deffered profit on inventory as on 1/1/18)
COGS 1	Cost of Goods Sold	8,700
	Inventory		8,700
	(to eliminate the deffered profit onintra company inventory sold as on 12/31/18)
GAIN	Investment in Young	37,600
	Equipment (72,000-47,000)	25,000
	Accumulated Depreciation- Equipment (72,000-9,400)		62,600
	(to eliminate the gain on equipment sold as on 1/1/18 and bring back the beginning book value based n historical cost)