In: Accounting
On 1/1/20, Polka Company acquired 80% of Jazz Company for $900,000. Jazz's retained earnings and capital stock accounts had balances of $500,000 each. An appraisal of Jazz's assets revealed that equipment was undervalued by $40,000. The equipment has a 5-year life and is being depreciated using the straight-line method. During 2020, Jazz reported $200,000 of net income. Assume that you are consolidating the balance sheets of Polka and Jazz on 12/31/20. Prepare the worksheet consolidation entries.
Working Notes:
Given:
Capital Balances - $500000
Retained Earnings - $500000
Asset Undervalued - $40000
Net profit during the Year 2020 = $200000
Depreciation for a 5 Year Life = $40000/5 = 8000 per year
Net Asset Undervalued = $40000-$8000 = $32000/-
Non - Controlling Interest (NCI) is Computed using Proprtionate Capital/ Net Assets Method:
Total Capital (or) Total Assets = $500000+$500000+$32000+$200000 = $1232000
Proportionate NCI =(1232000)*20% = $246400
Assumed that, polka company had purchased the share of 80% by payment through Bank,
Consolidation Entry:
Assets in Jazz Company A/c Dr. $1232000
To Bank A/c Cr. $900000
To Non Controlling Interest A/c cr. $246400
To Capital Reserve A/c Cr. $85600
(Balance in Figure)
Note: Difference between the Investment made in the Jazz Company, NCI & Total Net worth of Jazz Company is Transfered to Capital Reserve A/c ($900000+$246400-$1232000 = $85600)