Question

Prince Corporation holds 75 percent of the common stock of Sword Distributors Inc., purchased on December 31, 20X1, for $2,160,000. At the date of acquisition, Sword reported common stock with a par value of $910,000, additional paid-in capital of $1,260,000, and retained earnings of $540,000. The fair value of the noncontrolling interest at acquisition was $720,000. The differential at acquisition was attributable to the following items:

Inventory (sold in 20X2)	$	42,500
Land		59,500
Goodwill		68,000
Total Differential	$	170,000

During 20X2, Prince sold a plot of land that it had purchased several years before to Sword at a gain of $23,800; Sword continues to hold the land. In 20X6, Prince and Sword entered into a five-year contract under which Prince provides management consulting services to Sword on a continuing basis; Sword pays Prince a fixed fee of $93,000 per year for these services. At December 31, 20X8, Sword owed Prince $23,250 as the final 20X8 quarterly payment under the contract.

On January 2, 20X8, Prince paid $260,000 to Sword to purchase equipment that Sword was then carrying at $300,000. Sword had purchased that equipment on December 27, 20X2, for $450,000. The equipment is expected to have a total 15-year life and no salvage value. The amount of the differential assigned to goodwill has not been impaired.

At December 31, 20X8, trial balances for Prince and Sword appeared as follows:

	Prince Corporation									Sword Distributors Inc.
Item	Debit				Credit					Debit				Credit
Cash		$	59,700								$	47,000
Current Receivables			111,800									99,400
Inventory			291,000									233,900
Investment in Sword Distributors			2,816,825
Land			402,000									1,219,000
Buildings & Equipment			2,480,000									3,150,000
Cost of Goods Sold			2,188,000									508,000
Depreciation & Amortization			187,000									78,000
Other Expenses			1,373,000									218,000
Dividends Declared			46,000									16,000
Accumulated Depreciation						$	1,100,000								$	404,000
Current Payables							96,200									532,300
Bonds Payable							877,000									189,000
Common Stock							92,000									910,000
Additional Paid-in Capital							1,259,000									1,260,000
Retained Earnings, January 1							1,462,800									1,310,000
Sales							4,827,325									997,000
Other Income or Loss							94,000					33,000
Income from Sword Distributors							147,000
Total		$	9,955,325			$	9,955,325				$	5,602,300			$	5,602,300

As of December 31, 20X8, Sword had declared but not yet paid its fourth-quarter dividend of $5,000. Both companies use straight-line depreciation and amortization. Prince uses the fully adjusted equity method to account for its investment in Sword.

Required:
a. Compute the amount of the differential as of January 1, 20X8.

b. Verify the balance in Prince’s Investment in Sword Distributors account as of December 31, 20X8.

c. Present all consolidation entries that would appear in a three-part consolidation worksheet as of December 31, 20X8.

d. Prepare and complete a three-part worksheet for the preparation of consolidated financial statements for 20X8.

Answer 1

Requirement-a: Compute the amount of the differential as of January 1, 20X8

Original differential at December 31, 20X1	170,000
Less: Portion written off for sale of inventory	42,500
Remaining differential, January 1, 20X8	127,500

Requirement-b: Verify the balance in Prince’s Investment in Sword Distributors account as of December 31, 20X8

Sword Distributors retained earnings, January1, 20X8		1,310,000
Sword Distributors net income, 20X8
Sales	997,000
Cost of goods sold	-508,000
Depreciation and amortization	-78,000
Other expenses	-218,000
Other income (loss)	-33,000
Net income		160,000
Sword Distributors dividends, 20X8		-16,000
Sword Distributors earnings, December 31, 20X8		1,454,000
Sword Distributors Stockholder's equity:
Common stock		910,000
Additional paid-in capital		1,260,000
Retained Earnings, December 31, 20X8		1,454,000
Shareholder's equity, December 31, 20X8		3,624,000
Prince's ownership share		75%
Book value of shares held by Prince		2,718,000
Remaining differential at January 1, 20X8 (127,500*75%)		95,625
Balance in Investment in Sword Stock account, December 31, 20X8		2,813,625

Requirement-c:

Entry	Account Title and Explanation	Debit $	Credit $
E(1)	Income from subsidiary (160,000*75%)	120,000
	Dividends declared (16,000*75%)		12,000
	Investment in Sword Stock		108,000
	(To record the investment in Swors company)
E(2)	Income to Noncontrolling Interest (160,000*25%)	40,000
	Dividends declared (16,000*25%)		4,000
	Noncontrolling Interest (40,000-4,000)		36,000
	(To record the income assigned to noncontrolling interest)
E(3)	Common stock- Sword	910,000
	Additional paid-in capital	1,260,000
	Retained Earnings January 1, 20X8	1,310,000
	Differential	127,500
	Investment in Sword Stock		2,705,625
	Noncontrolling Interest (910,000+1,260,000+1,310,000+127,500)*25%		901,875
	(To eliminate beginning investment balance)
E(4)	Land	59,500
	Goodwill	68,000
	Differential		127,500
	(To assign differential)
E(5)	Retaines earnings, January 1	23,800
	Land		23,800
	(To eliminate unreailzed gain on land)
E(6)	Buildings and Equipment (450,000-260,000)	190,000
	Depreciation and Amortization (450,000/15)+(260,000/10)	56,000
	Accumulated Depreciation (450,000/15*5)+56,000		206,000
	Othe Income (Loss on Sale of Equipment) (300,000-260,000)		40,000
	(To eliminate unrealized loss on equipment)
E(7)	Other Income	93,000
	Other Expenses		93,000
	(To eliminate intercompany sale of service)
E(8)	Current Payables	23,250
	Current Receivables		23,250
	(To eliminate intercompany receivable/payable)
E(9)	Current Payables	3,000
	Current Receivables (4,000*75%)		3,000
	(To eliminate intercompany dividend owned)