In: Accounting
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 $900,000. At the acquisition date, the fair value of the noncontrolling interest was $600,000 and Keller’s book value was $1,200,000. Keller had developed internally a customer list that was not recorded on its books but had an acquisition-date fair value of $300,000. This intangible asset is being amortized over 20 years.
Gibson sold Keller land with a book value of $55,000 on January 2, 2017, for $130,000. Keller still holds this land at the end of the current year.
Keller regularly transfers inventory to Gibson. In 2017, it shipped inventory costing $227,500 to Gibson at a price of $350,000. During 2018, intra-entity shipments totaled $400,000, although the original cost to Keller was only $240,000. 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 $60,000 at the end of 2018.
Gibson Company | Keller Company | ||||||
Sales | $ | (1,000,000 | ) | $ | (700,000 | ) | |
Cost of goods sold | 700,000 | 500,000 | |||||
Operating expenses | 190,000 | 55,000 | |||||
Equity in earnings of Keller | (87,000 | ) | 0 | ||||
Net income | $ | (197,000 | ) | $ | (145,000 | ) | |
Retained earnings, 1/1/18 | $ | (1,316,000 | ) | $ | (720,000 | ) | |
Net income (above) | (197,000 | ) | (145,000 | ) | |||
Dividends declared | 125,000 | 70,000 | |||||
Retained earnings, 12/31/18 | $ | (1,388,000 | ) | $ | (795,000 | ) | |
Cash | $ | 189,000 | $ | 60,000 | |||
Accounts receivable | 396,000 | 610,000 | |||||
Inventory | 590,000 | 520,000 | |||||
Investment in Keller | 1,017,000 | 0 | |||||
Land | 170,000 | 590,000 | |||||
Buildings and equipment (net) | 516,000 | 500,000 | |||||
Total assets | $ | 2,878,000 | $ | 2,280,000 | |||
Liabilities | $ | (700,000 | ) | $ | (885,000 | ) | |
Common stock | (790,000 | ) | (520,000 | ) | |||
Additional paid-in capital | 0 | (80,000 | ) | ||||
Retained earnings, 12/31/18 | (1,388,000 | ) | (795,000 | ) | |||
Total liabilities and equities | $ | (2,878,000 | ) | $ | (2,280,000 | ) | |
(Note: Parentheses indicate a credit balance.)
Prepare a worksheet to consolidate the separate 2018 financial statements for Gibson and Keller.
How would the consolidation entries in requirement (a) have differed if Gibson had sold a building with a $160,000 book value (cost of $340,000) to Keller for $300,000 instead of land, as the problem reports? Assume that the building had a 10-year remaining life at the date of transfer.
Prepare a worksheet to consolidate the separate 2018 financial statements for Gibson and Keller. (Do not round intermediate calculations. For accounts where multiple consolidation entries are required, combine all debit entries into one amount and enter this amount in the debit column of the worksheet. Similarly, combine all credit entries into one amount and enter this amount in the credit column of the worksheet. Amounts in the Debit and Credit columns should be entered as positive. Negative amounts for the Noncontrolling Interest and Consolidated Totals columns should be entered with a minus sign.)
How would the consolidation entries in requirement (a) have differed if Gibson had sold a building with a $160,000 book value (cost of $340,000) to Keller for $300,000 instead of land, as the problem reports? Assume that the building had a 10-year remaining life at the date of transfer.
Consideration transferred ................................... $900,000
Noncontrolling interest fair value........................ 600,000
Subsidiary fair value at acquisition-date .......... $1,500,000
Book value................................................................. (1,200,000)
Fair value in excess of book value ..................... $300,000 Annual Excess
Excess fair value assignment ........................ Life Amortizations
to customer list................................................... 300,000 20 yrs. $15,000
-0-
a. CONSOLIDATION ENTRIES
Entry *TL
Retained Earnings, 1/1/18 (Gibson) ................. 75,000
Land .................................................................. 75,000
To remove unrealized gain on Intra-entity downstream transfer of land made in 2017.
Entry *G
Retained Earnings, 1/1/18 (Keller) ................... 24,500
Cost of Goods Sold ....................................... 24,500
To defer unrealized upstream Inventory gross profit from 2017 until 2018 computed as the 2017 ending inventory balance of $70,000 (20% × $350,000) multiplied by 35% gross profit rate ($122,500 ÷$350,000).
Entry *C
Retained Earnings, 1/1/18 (Gibson) ................. 23,700
Investment in Keller ....................................... 23,700
Parent is applying the partial equity method as can be seen by the amount in the Income of Keller Company account (60 percent of the reported balance). Thus, the parent’s share of amortization of $9,000 ($300,000 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, $24,500 of that reported net income has not actually been realized as of January 1, 2018. Thus, the previous accrual must be reduced by $14,700 to mirror the parent's 60% ownership. The total of the two adjustments being made here is $23,700.
Entry S
Common Stock(Keller) ....................................... 520,000
Additional Paid-In Capital .................................. 80,000
Retained Earnings, 1/1/18 (Keller) (adjusted
for Entry *G) ..................................................... 695,500
Investment in Keller (60%) ..................... 777,300
Noncontrolling Interest in Keller, 1/1/18 (40%) 518,200
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........................................................ 285,000
Investment in Keller ....................................... 171,000
Noncontrolling Interest in Keller, 1/1/18 (40%) 114,000
To recognize amount paid within acquisition price for the customer list. Original balance is adjusted for previous year’s amortization.
Entry I
Income of Keller ................................................... 87,000
Investment in Keller ....................................... 87,000
To eliminate intra-entity income accrual.
Entry D
Investment in Keller ............................................. 42,000
Dividends Paid ............................................... 42,000
To eliminate intra-entity dividend transfers—60% of subsidiary's payment.
Entry E
Amortization Expense......................................... 15,000
Customer List ................................................. 15,000
To recognize current period excess amortization expense.
Entry P
Liabilities................................................................. 60,000
Accounts Receivable .................................... 60,000
To eliminate intra-entity debt.
Entry Tl
Sales......................................................................... 400,000
Cost of Goods Sold ....................................... 400,000
To eliminate current year intra-entity inventory transfer.
Entry G
Cost of Goods Sold ............................................. 32,000
Inventory........................................................... 32,000
To defer 2018 unrealized inventory gross profit. Unrealized gain is the ending inventory of $80,000 (20% of $400,000) multiplied by 40% gross profit rate ($160,000 ÷ $400,000).
Noncontrolling Interest in Keller's Net Income
Keller reported net income ............................................................... $145,000
Excess fair value amortization ......................................................... (15,000)
2017 Intra-entity gross profit realized in 2018 (inventory).......... 24,500
2018 Intra-entity gross profit deferred (inventory) ...................... (32,000)
Keller realized income 2018............................................................... $122,500
Outside ownership percentage ....................................................... 40%
Noncontrolling interest in Keller's net income $ 49,000
GIBSON AND KELLER
Consolidation Worksheet
Year Ending December 31, 2018
Consolidation Entries Noncontrolling Consolidated
Accounts Gibson Keller Debit Credit Interest Totals
Sales (1,000,000) (700,000) (TI) 400,000 (1,300,000)
Cost of goods sold 700,000 500,000 (G) 32,000 (*G) 24,500 807,500
(TI) 400,000
Operating expenses 190,000 55,000 (E) 15,000 260,000
Income of Keller (87,000) -0- (I) 87,000 -0-
Separate company net income (197,000) (145,000)
Consolidated net income (232,500)
To noncontrolling interest (49,000) 49,000
To parent (183,500)
RE, 1/1/18—Gibson (1,316,000) (*TL) 75,000 (1,217,300)
(*C) 23,700
RE, 1/1/18—Keller (720,000) (*G) 24,500
(S) 695,500
Net income (above) (197,000) (145,000) (183,500)
Dividends 125,000 70,000 (D) 42,000 28,000 125,000
Retained earnings, 12/31/18 (1,388,000) (795,000) (1,275,800)
Cash 189,000 60,000 249,000
Accounts receivable 396,000 610,000 (P) 60,000 946,000
Inventory 590,000 520,000 (G) 32,000 1,078,000
Investment in Keller 1,017,000 (D) 42,000 (*C) 23,700 -0-
(S) 777,300
(I) 87,000
(A) 171,000
Land 170,000 590,000 (*TL) 75,000 685,000
Buildings and equipment (net) 516,000 500,000 1,016,000
Customer list (A) 285,000 (E) 15,000 270,000
Total assets 2,878,000 2,280,000 4,244,000
Liabilities (700,000) (885,000) (P) 60,000 (1,525,000)
Common stock (790,000) (520,000) (S) 520,000 (790,000)
Additional paid-in capital (80,000) (S) 80,000
Retained earnings, 12/31/18 (1,388,000) (795,000) (1,275,800)
NCI in Keller, 1/1/18 (S) 518,200 (518,200)
(A) 114,000 (114,000)
NCI In Keller, 12/31/18 653,200 (653,200)
Total liabilities and
equity
(2,878,000)
(2,280,000) 2,339,700 2,339,700
(4,244,000)
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) ................. 126,000
Buildings ................................................................ 40,000
Accumulated Depreciation .......................... 166,000
To defer unrealized gain ($140,000 original amount less one year of excess depreciation at $14,000 per year) as of beginning of year. Entry also returns Buildings account to historical cost (from $300,000 to $340,000) and Accumulated Depreciation account to historical cost (original $180,000 less one year of excess depreciation at $14,000). 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) ................. 126,000
Buildings (net) ................................................ 126,000
Entry ED
Accumulated Depreciation ................................ 14,000
Operating (or Depreciation) Expense ....... 14,000
To remove excess depreciation for current year created by transfer price. Excess depreciation for each year would be $14,000 based on allocating the $160,000 historical cost book value over 10 years ($16,000 per year) rather than the $300,000 transfer price ($30,000 per year).