Panama Company acquired 60 % of Samoa Corporation on 1/2018. Fair values of Samoa's assets and...

Panama Company acquired 60 %
of Samoa Corporation on 1/2018. Fair values of Samoa's assets and liabilities
approximated book values on that date. Panama uses the initial value method
to account for its investment in Samoa.
On 1/2019, Panama bought equipment from Samoa for $60,000 that had
originally cost Samoa $120,000 and had $ 90,000
of Accumulated depreciation at the time. The equipment had a five-year
remaining life and was being depreciated using the straight line method.
You are preparing the worksheet for the 2020 fiscal year.
a. Was this equipment sale upstream or downstream?
b. How much unrealized net gain from the equipment transfer remains at the
beginning of 2020? (this is the amount you will need for the *TA entry at 1/2020.)
c. Which company's Retained earnings account will be adjusted in the *TA entry
in part a? (Which company was the “initiator” of the transaction?)
d. How much excess depreciation will there be in each of the first five years
after the transfer?
e. Panama's 2020 net income, without including any investment income, was
$ 360,000 and Samoa reported net income of $ 115,000 in 2020.
What consolidated income will be reported before removing the noncontrolling
interest's share of the subsidiary's net income? (This includes the effect
of the ED entry.)
f. What will the noncontrolling interest's share of the subsidiary's net income be for
2020? (Consider whether the equipment sale had been upstream or downstream.)

Solutions

Expert Solution

a.Panama has acquired 60 PC of Samoa.So Panama is the parent company of Samoa.As Panama holds more than 50 pc voting stock in Samoa so it is a subsidiary of Panama.Upstream and downstream sales are normally associated with inter company sales.Upstream sale is a subsidiary selling into the parent entity; while downstream sales are from parent to subsidiary.So in this case it is a upstream sale.

b.Book value of equipment as on 1/2019

Original cost to Samoa		$120000
Accumulated dep as on 1/2019		$(90000)
Book value as on 1/2019		$30000

Gain as on 1/2019
Sale of equipment		$ 60000
Book value as on 1/2019		$(30000)
Gain in sale of equipment		$ 30000

Unrealized gain as on 1/2020
Unrealized gain as on 1/2019	($30000*60%)	$18000
Depreciation on unrealized gain	(30000/5*60%)	$(3600)
Unrealized gain as on 1/2020		$14400

c.Panamas retained earnings will be adjusted as he has to adjust the unrealized gains in it's Profit and loss statement.Panama has to defer the unrealized gain from the equipment purchase transaction.

Panamais the initiator of the transaction.An initiator is an organization that initiates a transaction event with another organization.

Excess depreciation
Depreciation as on 1/20 if the equipment was not sold Samoa	(30000/5)	(6000)
Depreciation as on 1/20 after the sale	(60000/5)	12000
Excess dep		6000

Consolidated net income
Panamas net income as on 2020		$360000
Samoas net income as on 1/2020 Less: unrealized inter-company gain on upstream land sale	115000 (30000)	$85000
Consolidated net income		$275000

f.Non controlling interest share of subsidiary is $85000*40 %= 34000.

Non controlling interest is the portion of a subsidiary Corp stock that is not owner by the parent corporation.

ekkarill92 answered 1 year ago

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