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On 1/1/20, Polka Company acquired 80% of Jazz Company for $900,000. Jazz's retained earnings and capital...

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.

Solutions

Expert Solution

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)

ekkarill92 answered 2 years ago
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