Question

Prince Corporation holds 75 percent of the common stock of Sword Distributors Inc., purchased on December 31, 20X1, for $2,100,000. At the date of acquisition, Sword reported common stock with a par value of $930,000, additional paid-in capital of $1,280,000, and retained earnings of $520,000. The fair value of the noncontrolling interest at acquisition was $700,000. The differential at acquisition was attributable to the following items:

            
Inventory (sold in 20X2)   $   17,500     
Land      24,500     
Goodwill      28,000     
Total Differential   $   70,000     

During 20X2, Prince sold a plot of land that it had purchased several years before to Sword at a gain of $9,800; Sword continues to hold the land. In 20X6, Prince and Sword entered into a five-year contract under which Prince provides management consulting services to Sword on a continuing basis; Sword pays Prince a fixed fee of $83,000 per year for these services. At December 31, 20X8, Sword owed Prince $20,750 as the final 20X8 quarterly payment under the contract.

On January 2, 20X8, Prince paid $240,000 to Sword to purchase equipment that Sword was then carrying at $280,000. Sword had purchased that equipment on December 27, 20X2, for $420,000. The equipment is expected to have a total 15-year life and no salvage value. The amount of the differential assigned to goodwill has not been impaired.

At December 31, 20X8, trial balances for Prince and Sword appeared as follows:

    Prince Corporation      Sword Distributors Inc.
Item   Debit   Credit      Debit   Credit
Cash      $   62,700                        $   50,000                 
Current Receivables         106,800                           94,400                 
Inventory         288,000                           236,900                 
Investment in Sword Distributors         2,829,325                                            
Land         411,000                           1,210,000                 
Buildings & Equipment         2,460,000                           3,090,000                 
Cost of Goods Sold         2,182,000                           509,000                 
Depreciation & Amortization         187,000                           74,000                 
Other Expenses         1,376,000                           211,000                 
Dividends Declared         49,000                           19,000                 
Accumulated Depreciation                  $   1,101,000                        $   409,000     
Current Payables                     92,200                           381,300     
Bonds Payable                     934,000                           194,000     
Common Stock                     98,000                           930,000     
Additional Paid-in Capital                     1,270,000                           1,280,000     
Retained Earnings, January 1                     1,468,800                           1,330,000     
Sales                     4,735,825                           1,004,000     
Other Income or Loss                     93,000               34,000                 
Income from Sword Distributors                     159,000                                
Total      $   9,951,825         $   9,951,825            $   5,528,300         $   5,528,300     

As of December 31, 20X8, Sword had declared but not yet paid its fourth-quarter dividend of $5,000. Both companies use straight-line depreciation and amortization. Prince uses the fully adjusted equity method to account for its investment in Sword.

Required:
a. Compute the amount of the differential as of January 1, 20X8.

b. Verify the balance in Prince’s Investment in Sword Distributors account as of December 31, 20X8.

c. Present all consolidation entries that would appear in a three-part consolidation worksheet as of December 31, 20X8.

• Record the basic consolidation entry.
• Record the excess value (differential) reclassification entry.
• Record the entry to eliminate the intercompany service revenue.
• Record the entry to eliminate the intercompany receivables/payables.
• Record the entry to eliminate the intercompany dividend owed.
• Record the entry to eliminate the gain on the sale of land.
• Record the entry to eliminate the gain on equipment and to correct the asset's basis.
• Record the entry to adjust Accumulated Depreciation.

PLEASE HELP!

Answer 1

a. Amount of the differential as of January 1, 20X8

Original differential, December 31, 20X1	$70,000
Less: Portion written off for sale of inventory	$17,500
Remaining differential, January 1, 20X8	$52,500

b. Balance in Prince’s Investment in Sword Distributors account

Sword retained earnings, January 1, 20X8		$1,330,000
Sword net income, 20X8
Sales	$1,004,000
Cost of goods sold	-$509,000
Depreciation and amortization	-$74,000
Other expenses	-$211,000
Other income (loss)	-$34,000
Net income		$176,000
Sword dividends, 20X8		-$19,000
Sword retained earnings, December 31, 20X8		$1,487,000
Sword stockholders' equity:
Common stock		$930,000
Additional paid in capital		$1,280,000
Retained earnings, December 31, 20X8		$1,487,000
Stockholders' equity, December 31, 20X8		$3,697,000
Prince's ownership share		75%
Book value of shares held by Prince		$2,772,750
Remaining differential, January 1, 20X8 ($52,500 * 75%)		$39,375
Balance in Investment in Sword Stock account, December 31, 20X8		$2,812,125

c. Consolidation entries

Account	Debit	Credit
Income from subsidiary ($176,000 * 75%)	$132,000
Dividends declared ($19,000 * 75%)		$14,250
Investment in Sword Stock		$117,750
To record investment in Sword Co
Income to non-controlling interest ($176,000 * 25%)	$44,000
Dividends declared ($19,000 * 25%)		$4,750
Non-controlling interest		$39,250
To record income assigned to non-controlling interest
Common stock - Sword	$930,000
Additional paid in capital	$1,280,000
Retained earnings	$1,330,000
Differential	$52,500
Investment in Sword Stock		$2,694,375
Non-controlling interest [($930,000 + $1,280,000 + $1,330,000 + $52,500) * 25%]		$898,125
To eliminate beginning investment balance
Land	$24,500
Goodwill	$28,000
Differential		$52,500
To assign differential
Retained earnings	$9,800
Land		$9,800
To eliminate unrealized gain on land
Buildings & Equipment ($420,000 - $240,000)	$180,000
Depreciation & Amortization [($420,000 / 15) - ($240,000 / 10)]	$52,000
Accumulated Depreciation [($420,000 / 15 * 5) + $52,000]		$192,000
Other income (loss on sale of equipment) ($280,000 - $240,000)		$40,000
To eliminate unrealized loss on sale of equipment
Other income	$83,000
Other expenses		$83,000
To eliminate intercompany sale of services
Current payables	$20,750
Current receivables		$20,750
To eliminate intercompany receivables / payables
Current payables	$3,563
Current receivables ($4,750 * 75%)		$3,563
To eliminate intercompany dividend owed