Question

On January 1, 20X8, Potter Corporation acquired 90 percent of Shoemaker Company's voting stock, at underlying book value. The fair value of the noncontrolling interest was equal to 10 percent of the book value of Shoemaker at that date. Potter uses the fully adjusted equity method in accounting for its ownership of Shoemaker. On December 31, 20X9, the trial balances of the two companies are as follows:

	Potter Company								Shoemaker Corporation
		Debit			Credit						Debit			Credit
Current Assets	$	200,000								$	140,000
Depreciable Assets		350,000									250,000
Investment in Shoemaker Corp.		162,000
Depreciation Expense		27,000									10,000
Other Expenses		95,000									60,000
Dividends Declared		20,000									10,000
Accumulated Depreciation				$	118,000								$	80,000
Current Liabilities					100,000									80,000
Long-Term Debt					100,000									50,000
Common Stock					100,000									50,000
Retained Earnings					150,000									100,000
Sales					250,000									110,000
Income from Subsidiary					36,000
	$	854,000		$	854,000					$	470,000		$	470,000

Required:

1. What amount would be reported as total assets in the consolidated balance sheet at December 31, 20X9?

2. What amount would be reported as total liabilities in the consolidated balance sheet at December 31, 20X9?

3. What amount would be reported as retained earnings in the consolidated balance sheet prepared at December 31, 20X9?

4.What amount would be reported as noncontrolling interest in the consolidated balance sheet at December 31, 20X9?

5. What amount would be reported as total stockholders' equity in the consolidated balance sheet at December 31, 20X9?

6. What amount would be reported as income to controlling interest in the consolidated financial statements for 20X9?

Answer 1

Under equity method, all individual assets and liabilities of subsidiary are not added in the assets of holding company. Only investment' s value is adjusted for holding's share in income earned by subsidiary and dividend declared by subsidiary.

1.

Total assets in the consolidated balance sheet at December 31, 20X9
PATICULARS	AMOUNT
Current Assets	$ 2,00,000
Depreciable Assets	$ 3,50,000
Less: Accumulated depreciation	$-1,18,000
Investment in Shoemaker Corp.	$ 1,89,000
	$ 6,21,000
Investments in Shoemaker corp.	$ 1,62,000
Add: profits earned during the year	$      36,000
LESS: POTTER'S SHARE IN DIVIDEND DECLARED BY SHOEMAKER (10000*90%)	$        9,000
Closing Balance	$ 1,89,000

It is assumed that cash received on dividends already taken for in current assets. Alternatively, current assets can be increased by $9,000 for potter's share of dividend.

2.

Total liabilities in the consolidated balance sheet at December 31, 20X9
PATICULARS	AMOUNT
Current Liabilities	$ 1,00,000
Long-Term Debt	$ 1,00,000
	$ 2,00,000

3.

retained earnings in the consolidated balance sheet prepared at December 31, 20X9
PATICULARS	AMOUNT
Retained Earnings	$ 1,50,000
Add: share in shoemakers income	$     36,000
	$ 1,86,000

4.

noncontrolling interest in the consolidated balance sheet at December 31, 20X9

NIL as only potter's share would be reported under equity method.

5.

total stockholders' equity in the consolidated balance sheet at December 31, 20X9
Common Stock	$ 1,00,000
Retained Earnings	$ 1,86,000
	$ 2,86,000

6.

CALCULATION OF NET INCOME OF SHOEMAKER CORPORATION FOR THE YEAR ENDING DECEMBER 31,2019
PATICULARS	AMOUNT
SALES	$      1,10,000
Less:
Depreciation Expense	$          10,000
Other Expenses	$          60,000
NET INCOME	$          40,000
POTTER'S SHARE	90%
	$          36,000