Question
In: Accounting
Prince Corporation holds 75 percent of the common stock of Sword Distributors Inc., purchased on December...
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.
Solutions
Expert Solution
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) |
ekkarill92 answered 1 year agoRelated Solutions
Prince Corporation holds 75 percent of the common stock of Sword Distributors Inc., purchased on December...
Prince Corporation holds 75 percent of the common stock of Sword
Distributors Inc., purchased on December 31, 20X1, for $2,100,000.
At the date of acquisition, Sword reported common stock with a par
value of $930,000, additional paid-in capital of $1,280,000, and
retained earnings of $520,000. The fair value of the noncontrolling
interest at acquisition was $700,000. The differential at
acquisition was attributable to the following items:
Inventory (sold in 20X2) $
17,500
Land 24,500 ...
Prince Corporation holds 75 percent of the common stock of Sword Distributors Inc., purchased on December...
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At the date of acquisition, Sword reported common stock with a par
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Inventory (sold in 20X2)
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Cost of goods sold
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Depreciation and
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109,000
138,000
Gain on sale of building
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Interest expense
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Consolidated net income
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Revenues
$
(945,000
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$
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Cost of goods
sold
619,000
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Depreciation and
amortization
109,000
138,000
Gain on sale of
building
0
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Interest
expense
49,000
49,000
Consolidated net
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Bolero Company holds 75 percent of the common stock of Rivera, Inc., and 30 percent of...
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Revenues
$
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$
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Cost of goods sold
622,000
662,000
Depreciation and amortization
112,000
144,000
Gain on sale of building
0
(42,000
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Interest expense
52,000
52,000
Consolidated net income
(174,000
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(274,000
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to noncontrolling interest
31,000
33,000
to parent company
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Prince Corporation
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Item
Debit
Credit
Debit
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83,000
$
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Accounts Receivable
67,000
72,000
Inventory
177,000
104,000
Land
81,000
26,000
Buildings and Equipment
491,000
159,000
Investment in Sword Company
255,000
Cost of Goods Sold
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Prince Corporation acquired 100 percent of Sword Company on January 1, 20X7, for $183,000. The trial...
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Prince Corporation
Sword Company
Item
Debit
Credit
Debit
Credit
Cash
$
88,000
$
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Accounts Receivable
53,000
58,000
Inventory
182,000
120,000
Land
86,000
22,000
Buildings and Equipment
491,000
155,000
Investment in Sword Company
233,000
Cost of Goods Sold
491,000
258,000
Depreciation Expense
21,000
11,000
Other Expenses
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Bonds Payable100,000
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Cost of goods sold
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Depreciation and amortization
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2018
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$
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Cost of goods sold
605,000
645,000
Depreciation and
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95,000
110,000
Gain on sale of building
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Interest expense
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