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.)

THE ANSWER TO A IS NOT 146,040

Answer 1

Solution:-

Note:-

Depreciation expense: purchaser = ($219,000 / 12) = $18,250; consolidated = ($243,000 / 15) = $16,200

Gain realized each year = differential depreciation = $18,250 - $16,200 = $2,050 credit (gain realized)

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

Particulars	Amount
Baywatch’s separate operating income	110,000
Baywatch’s share of Tubberware’s realized income:
[($43,000 + $2,050) x 80%]	36,040
Consolidated net income	146,040

b. By what amount would consolidated net income change if the equipment sale had been a downstream sale rather than an upstream sale:-

Particulars	Amount
Baywatch’s separate operating income realized ($110,000 + $2,050)	112,050
Baywatch’s share of Tubberware’s income ($43,000 x 80%)	34,400
Consolidated net income	134,500

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:-

Account titles and explanation	Debit	Credit
Retained Earnings, Jan. 1 ($20,500 x 80%)	16,400
Noncontrolling Interest ($20,500 x 20%)	4,100
Equipment ($243,000 - $219,000)	24,000
Depreciation Expense ($18,250 - $16,200)		2,050
Accumulated Depreciation [($16,200 x 6 yrs) – ($18,250 x 3 yrs)]		42,450

Gain = $219,000 – ($243,000 – ($16,200 x 3 yrs)) = $24,600

Unrealized gain at Jan. 1, 20X8 = $24,600 – ($2,050 x 2 yrs) = $20,500