Question

The individual financial statements for Gibson Company and Keller Company for the year ending December 31, 2018, follow. Gibson acquired a 60 percent interest in Keller on January 1, 2017, in exchange for various considerations totaling $570,000. At the acquisition date, the fair value of the noncontrolling interest was $380,000 and Keller’s book value was $850,000. Keller had developed internally a customer list that was not recorded on its books but had an acquisition-date fair value of $100,000. This intangible asset is being amortized over 20 years. Gibson sold Keller land with a book value of $60,000 on January 2, 2017, for $100,000. Keller still holds this land at the end of the current year. Keller regularly transfers inventory to Gibson. In 2017, it shipped inventory costing $100,000 to Gibson at a price of $150,000. During 2018, intra-entity shipments totaled $200,000, although the original cost to Keller was only $140,000. In each of these years, 20 percent of the merchandise was not resold to outside parties until the period following the transfer. Gibson owes Keller $40,000 at the end of 2018.

Gibson Company Keller Company

Sales $   (800,000) $   (500,000) Cost of goods sold 500,000   300,000   Operating expenses 100,000   60,000   Equity in earnings of Keller     (84,000)      –0–   Net income $    (284,000) $    (140,000) Retained earnings, 1/1/18 $(1,116,000) $    (620,000) Net income (above) (284,000) (140,000) Dividends declared     115,000         60,000   Retained earnings, 12/31/18 $(1,285,000) $    (700,000) Cash $  177,000   $   90,000   Accounts receivable 356,000   410,000   Inventory 440,000   320,000   Investment in Keller 726,000   –0–   Land 180,000   390,000   Buildings and equipment (net)    496,000      300,000   Total assets $  2,375,000   $ 1,510,000   Liabilities $   (480,000) $   (400,000) Common stock (610,000) (320,000) Additional paid-in capital –0–   (90,000) Retained earnings, 12/31/18   (1,285,000)    (700,000) Total liabilities and equities $(2,375,000) $(1,510,000)

a) Prepare a worksheet to consolidate the separate 2018 financial statements for Gibson and Keller.

b) How would the consolidation entries in requirement (a) have differed if Gibson had sold a building with a $60,000 book value (cost of $140,000) to Keller for $100,000 instead of land, as the problem reports? Assume that the building had a 10-year remaining life at the date of transfer. Short explanation for this one please.

Answer 1

Consideration transferred ...................................... $570,000

Noncontrolling interest fair value...........................    380,000

Subsidiary fair value at acquisition-date .............. $950,000

Book value..................................................................   (850,000)

Fair value in excess of book value ........................ $100,000 Remaining Annual Excess

Excess fair value assignment .......................... Life Amortization

to customer list.....................................................    100,000 20 yrs. $5,000

-0-

a. CONSOLIDATION ENTRIES

Entry *TL

Retained earnings, 1/1/18 (Gibson) ................... 40,000

Land ................................................................... 40,000

To remove intra-entity gain on Intra-entity downstream transfer of land made in 2017

Entry *G

Retained earnings, 1/1/18 (Keller) ...................... 10,000

Cost of goods sold ........................................... 10,000

To defer intra-entity upstream Inventory gross profit from 2017 until 2018 ($150,000 − $100,000 = $50,000 total gross profit × 20% inventory remaining = $10,000).

Entry *C

Retained earnings, 1/1/18 (Gibson) ................... 9,000

Investment in Keller ........................................ 9,000

Parent is applying the partial equity method as can be seen by the amount in the Equity in earnings of Keller Company account (60 percent of the reported balance). Thus, the parent’s share of amortization of $3,000 ($100,000 divided by 20 years × 60%) must be recognized for the previous year 2017. In addition, the equity accrual recorded by the parent has been based on Keller's reported net income. As shown in Entry *G, $10,000 of that reported net income relates to intra-entity ending inventory as of January 1, 2018. Thus, the previous accrual must be reduced by $6,000 to mirror the parent's 60% ownership. The total of the two adjustments being made here is $9,000.

  

Entry S

Common stock (Keller) ......................................... 320,000

Additional paid-in capital ...................................... 90,000

Retained earnings, 1/1/18 (Keller) (adjusted

for Entry *G) ...................................................... 610,000

Investment in Keller (60%) ....................... 612,000

Noncontrolling interest in Keller, 1/1/18 (40%) 408,000

To remove stockholders' equity accounts of Keller and recognize beginning noncontrolling interest. Retained earnings balance has been adjusted in Entry *G.

Entry A

Customer list............................................................ 95,000

Investment in Keller ........................................ 57,000

Noncontrolling interest in Keller, 1/1/18 (40%) 38,000

To recognize amount paid within acquisition price for the customer list. Original balance is adjusted for previous year’s amortization.

Entry I

Equity in earnings of Keller ................................. 84,000

Investment in Keller ........................................ 84,000

To eliminate intra-entity income accrual.

Entry D

Investment in Keller .............................................. 36,000

Dividends declared ......................................... 36,000

To eliminate intra-entity (60%) dividend transfers.

Entry E

Amortization expense............................................ 5,000

Customer list ..................................................... 5,000

To recognize current period excess amortization expense.

Entry P

Liabilities.................................................................. 40,000

Accounts receivable ........................................ 40,000

To eliminate intra-entity debt.

Entry Tl

Sales......................................................................... 200,000

Cost of goods sold ........................................... 200,000

To eliminate current year intra-entity inventory transfer.

Entry G

Cost of goods sold ................................................. 12,000

Inventory............................................................ 12,000

To defer 2018 intra-entity inventory gross profit in ending inventory. ($200,000 − $140,000 = $60,000 total gross profit × 20% remaining inventory = $12,000).

Net income attributable to noncontrolling interest

Keller reported net income .................................................................. $140,000

Excess fair value amortization ................................................. (5,000)

2020 Intra-entity gross profit recognized in 2018(inventory)......... 10,000

2018 Intra-entity gross profit deferred (inventory) ............................    (12,000)

Keller adjusted net income 2018........................................................ $133,000

Outside ownership percentage ..........................................................    40%

Net income attributable to noncontrolling interest .................... $ 53,200

GIBSON AND KELLER

Consolidation Worksheet

Year Ending December 31, 2018

b.   

If the intra-entity transfer had been a building rather than land, two adjustments to the consolidation entries would be needed. Entry *TL would be changed and relabeled as Entry *TA and an Entry ED would be added to eliminate the overstatement of depreciation expense for 2018. All other consolidation entries would be the same as shown in Part a. As a downstream transfer, entries *C and S are not affected.

Entry *TA

Retained earnings, 1/1/18 (Gibson) ................... 36,000

Buildings ................................................................. 40,000

Accumulated depreciation ............................. 76,000

To defer intra-entity gain ($40,000 original amount less one year of excess depreciation at $4,000 per year) as of beginning of year. Entry also returns Buildings account to historical cost (from $100,000 to $140,000) and Accumulated Depreciation account to historical cost (original $80,000 less one year of excess depreciation at $4,000). Because the Buildings account is shown at net value in the information given in this problem, the above entry would probably be made as follows:

Entry *TA (Alternative)

Retained earnings, 1/1/18 (Gibson) ................... 36,000

Buildings (net) .................................................. 36,000

Entry ED

Accumulated depreciation ................................... 4,000

Operating (or depreciation) expense ............ 4,000

To remove excess depreciation for current year created by transfer price. Excess depreciation for each year would be $4,000 based on allocating the $60,000 historical cost book value over 10 years ($6,000 per year) rather than the $100,000 transfer price ($10,000 per year).