Question

Baywatch Industries has owned 80 percent of Tubberware Corporation for many years. On January 1, 20X6, Baywatch paid Tubberware $219,000 to acquire equipment that Tubberware had purchased on January 1, 20X3, for $243,000. The equipment is expected to have no scrap value and is depreciated over a 15-year useful life. Baywatch reported operating earnings of $110,000 for 20X8 and paid dividends of $35,000. Tubberware reported net income of $43,000 and paid dividends of $23,000 in 20X8. (Leave no cell blank, enter "0" wherever required.)

Required: a. Compute the amount reported as consolidated net income for 20X8.

b. By what amount would consolidated net income change if the equipment sale had been a downstream sale rather than an upstream sale? c. Prepare the consolidation entry or entries required to eliminate the effects of the intercompany sale of equipment in preparing a full set of consolidated financial statements at December 31, 20X8. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

	General Points
1)	Baywatch Industries Purchased 80% ownership of Tubberware Corporation on 20X0
2)	On 1st Jan 20X6 Baywatch paid Tuberware for purchase of equipment, which is purchased by Tuberware on 1st Jan20X3 for $243000	$ 2,19,000.00
3)	Useful life of equipment	15	Years
4)	Baywatch reported net income on 20X8	$ 1,10,000.00
	Baywatch reported dividend paid on 20X8	$     35,000.00
5)	Tuberware reported net income on 20X8	$     43,000.00
	Tuberware reported dividend paid on 20X8	$     23,000.00
	Depreciation Expense of Tuberware=($243000/15)	$     16,200.00
	Depreciation Expense of Baywatch=($219000/12)	$     18,250.00
	Differential Depreciation($18250-$16200)	$       2,050.00
a)	Baywatch Operating Income	$ 1,10,000.00
	Baywatch share in Tuberware net income=($43000+$2050)*80%	$     36,040.00
	Consolidated Net Income	$ 1,46,040.00
b)	Baywatch separate Operating Income($110000+$2050)	$ 1,12,050.00
	Baywatch share in Tuberware income=($43000*80%)	$     34,400.00
	Consolidated Net Income	$ 1,46,450.00
	Difference arises in Net income because in (a) 20% of realized gain is allocated to non controlling interest but in (b) entire realized gain allocated to Baywatch Company
	Downsteam Sales: When Parent sells to Subsidiary
	Upsteam Sales: When Subsidiary sells to Parent
c)	Retained Earnings($19900*80%)	$     15,920.00
	Non controlling interest($19900*20%)	$       3,980.00
	Equipment	$     24,600.00
	To Depreciation Expense($16200-$18250)		$   2,050.00
	To Accumulated Depreciation($16200*6-$18250*3)		$ 42,450.00
	Gain on Sales=(($219000-($243000-($16200*3))	$     24,600.00
	Balance=($42450+$2050-$24600)=$19900