Question

On January 1, 2019, Monica Company acquired 80 percent of Young Company’s outstanding common stock for $888,000. The fair value of the noncontrolling interest at the acquisition date was $222,000. Young reported stockholders’ equity accounts on that date as follows:

Common stock—$10 par value	$	300,000
Additional paid-in capital		70,000
Retained earnings		630,000

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 $90,000. 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 20 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)
2019	$	30,000			$	32,000
2020		50,000				34,000
2021		60,000				40,000

In addition, Monica sold Young several pieces of fully depreciated equipment on January 1, 2020, for $58,000. The equipment had originally cost Monica $94,000. Young plans to depreciate these assets over a 5-year period.

In 2021, Young earns a net income of $200,000 and declares and pays $65,000 in cash dividends. These figures increase the subsidiary's Retained Earnings to a $960,000 balance at the end of 2021.

Monica employs the equity method of accounting. Hence, it reports $154,640 investment income for 2021 with an Investment account balance of $1,062,800. 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 Acquisition:-

Consideration transferred by Monica to Young for 80% of Share		$ 888,000
Fair Value of Non Controlling interest		$ 222,000
Total Fair Value of Young Company		$ 1,110,000
Less Book Value:
Common Stock		$ 300,000
Additional Paid in capital		$ 70,000
Retained Earning		$ 630,000
Excess of Fair Value over book Value		$ 110,000
Excess Fair Value assign to:
Building		$ 90,000
Franchise Agreement (Balance)		$ 20,000

Calculation of Retained Earning of Young as on 1/1/2021:

Retained Earnings as on 12/31/2021		$ 960,000
Less: Net Income during the year 2021		$ 200,000
Add: Dividend		$ 65,000
Unadjusted Retained Earnings 1/1/21		$ 825,000
Less: Removal of Deferred profit 1/1/21		$ 6,800
Adjusted Retained Earning 1/1/2021		$ 818,200

Calculation of Adjustment of Conversion from Cost of Equity:

Retained Earnings 1/1/21		$ 818,200
Less: Retained Earnings 1/1/19		$ 630,000
Increase in Retained Earnings		$ 188,200
Less: Amortization of Excess Value for 2 years (20,000 *2)		$ 40,000
Adjusted Balance		$ 148,200
Share of Monica (148,200 * 80%)		$ 118,560

No		Debit	Credit
1)	Retained Earnings 1/1/21 (Young)	$ 6,800
	Cost of Goods sold (34,000 *20%)		$ 6,800
2)	Retained Earnings 1/1/21 (Monica) (58,000 - 58,000/5)	$ 46,400
	Equipment (94,000 - 58,000)	$ 36,000
	Accumulated Depreciation (94,000 - 11,600)		$ 82,400
3)	Investment in Young	$ 118,560
	Retained Earnings 1/1/21 (Monica)		$ 118,560
4)	Common Stock (Young)	$ 300,000
	Additional paid in capital - Young	$ 70,000
	Retained Earnings 1/1/21 (Young)	$ 818,200
	Investment in Young (80%)		$ 950,560
	Non Controlling interest in Young (20%)		$ 237,640
5)	Building [90,000 - (90,000/5)*2]	$ 54,000
	Franchise agreement [20,000 - (20,000/10)*2]	$ 16,000
	Investment in Young (80%)		$ 56,000
	Non Controlling interest in Young (20%)		$ 14,000
6)	Dividend Income (65,000 *80%)	$ 52,000
	Dividends Declared		$ 52,000
7)	Depreciation Expenses	$ 18,000
	Amortization Expenses	$ 2,000
	Franchise agreement		$ 2,000
	Building		$ 18,000
8)	Sales	$ 60,000
	Cost of Goods sold		$ 60,000
9)	Cost of Goods sold	$ 8,000
	Inventory		$ 8,000
10)	Accumulated Depreciation	$ 11,600
	Depreciation Expenses		$ 11,600

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