Question

On January 1, 2019, Monica Company acquired 80 percent of Young Company’s outstanding common stock for $776,000. The fair value of the noncontrolling interest at the acquisition date was $194,000. Young reported stockholders’ equity accounts on that date as follows: Common stock—$10 par value $ 200,000 Additional paid-in capital 70,000 Retained earnings 490,000 In establishing the acquisition value, Monica appraised Young's assets and ascertained that the accounting records undervalued a building (with a five-year remaining life) by $70,000. Any remaining excess acquisition-date fair value was allocated to a franchise agreement to be amortized over 10 years. During the subsequent years, Young sold Monica inventory at a 30 percent gross profit rate. Monica consistently resold this merchandise in the year of acquisition or in the period immediately following. Transfers for the three years after this business combination was created amounted to the following: Year Transfer Price Inventory Remaining at Year-End (at transfer price) 2019 $ 30,000 $ 18,000 2020 50,000 20,000 2021 60,000 26,000 In addition, Monica sold Young several pieces of fully depreciated equipment on January 1, 2020, for $44,000. The equipment had originally cost Monica $66,000. Young plans to depreciate these assets over a 5-year period. In 2021, Young earns a net income of $220,000 and declares and pays $65,000 in cash dividends. These figures increase the subsidiary's Retained Earnings to a $820,000 balance at the end of 2021. Monica employs the equity method of accounting. Hence, it reports $160,960 investment income for 2021 with an Investment account balance of $940,160. Prepare the worksheet entries required for the consolidation of Monica Company and Young Company.

Answer 1

Consideration transfered by Monica to Young for 80%share	776,000
Fair value of non-controlling interest	194,000
Total fair value of Young company	970,000
Less: Book value
Common stock	-200,000
Additional paid capital	-70,000
Retained earnings	-49,000
Excess of fairvalue over book value	210,000
Excess fair value assigned to:
Building	70,000
Franchise agreement(balance)	140,000

Depreciation/amortization of excess value of assets acquired:

Assets	value on 1/1/19 (A)	life in years (B)	Amortization per year (C=A/B)	Value on 12/31/19(D)	Value on 12/31/20 (D-C)
Building	70,000	5	14,000	56,009	42,000
Franchise agreement	140,000	10	14,000	126,000	112,000
Total	210,000		28,000	182,000	154,000

calculation of deferred profits on intra company sale:

(Inventory transferred upstream)

Year	Inventory at year end (A)	profit%(B)	deferred profit C=A/B
2020	20,000	30%	6000
2021	26,000	30%	7800

Equipment transfer (down stream):
Original cost and accumulated depreciation	66,000
Gain on sale on 1/1/20	44,000
Life	5
Excess depreciation per year (44,000/5)	8, 800
Deferred gain on equipment 1/1/21
Gain on sale of equipment on 1/1/20	44,000
Less: depreciation on equipment per year	8,800
Deferred gain on equipment 1/1/21	35,200

calculation of retained earnings of Young as on 1/1/21:

Retained earnings as on 12/31/21	820,009
Less: net income during the year	220,000
Add: dividend	65,000
Un adjusted retained earnings	665,000
Less: removal of deferred profits	6000
Retained earnings as on 1/1/21	659,000

Consolidation entries worksheet:

S. No	accounts title & explanation	Debit($)	Credit($)
1	retained earnings-Young (1/1/21)	6,000
	Cost of goods sold		6,000
	(To record deferred profit on inventory as on 1/1/21)
2	Investment in Young	35,000
	Equipment (66,000-44,000)	22,000
	Accumulated depreciation (66,000-8,800)		57,200
	(To eliminate the gain on equipment sold as on 1/1/21& bring back beginning book value based on historical cost)
3	No entry required
4	common shares-young	200,000
	Addition paid in capital-Young	70,000
	Retained earnings Young(1/1/21)	659,000
	Investment in Young-80%		743,000
	Non controlling interest-20%		185,800
	(To eliminate equity account of subsidiary and recognize non control interest)
5	Building	42,000
	Franchise agreement	112,000
	Investment in Young (80%)		123,200
	Non controlling interest (20%)		30,800
	(To record un amortised value of excess assets as on 1/1/20)

S. No	accounts title and explanation	debit ($)	Credit ($)
6	investment income	160,960
	Investment in Young		160,960
	(To eliminate intra entity income accrual)
7	investment in young	52,000
	Dividebd declared(65,000*80%)		52,000
	(To eliminate intra company dividend transfers)
8	amortization expense	14,000
	Depreciation expense	14,000
	Building		14,000
	Franchise		14,000
	(To record amortization and depreciation during year)
9	sales	60,000
	Cost of goods sold		60,000
	(To eliminate intra company inventory transfer during the year)
10	cost of goods sold	7,800
	Inventory		7,800
	(To eliminate deferred profit on intra company inventory sold on 12/31/21)
11	accumulated depreciation	8,800
	Depreciation expense		8,800
	(Remove excess depreciation on intra company assets)