Question

On January 1st 2020, Hulk Company acquired all of the stock of Spiderman Company at book value.

Hulk uses the initial value method to account for its investment in Spiderman and Spiderman doesn't pay any dividends.

On January 1st 2015 Hulk purchased a piece of equipment for $100,000. This equipment is expected to last 10 years with $7000 salvage; Hulk uses straight line depreciation.  

On January 1, 2018, Hulk sold the equipment to Spiderman for $81,000 receiving a 1 year 12% note with principle and interest due January 1, 2019. Spiderman believes the equipment will last 7 years and have a $4000 salvage.  

On January 1, 2021 Spiderman sold the equipment to Aquaman (an outside company) for $57,000 cash.  

REQUIRED:

A) Make Hulk's journal entry when they sold the equipment at to Spiderman

b) make Spiderman's journal entry when they buy the equipment from Hulk

c) Make the necessary worksheet entries for 2018

d) Hulk reported unconsolidated income of $500,000 in 2018 and Spiderman reported income of $70,000. What is consolidated income?

e) make the necessary worksheet entries for 2019

f) make the journal entry Spiderman makes when it sells the equipment to Aquaman

g) In 2021 Hulk reported income (unconsolidated) of $625,000 and Spiderman reported income of $123,000 what is consolidated income

Answer 1

A.

workng 1

Calculaton of Depreciaton on eqipment purchased on 1st Jan 2015

Method of Depriciaton s straight line = (Purchase cost-Residual Value)/expected no of years

= $1,00,000-$7,000/10 Years = $9,300

Workng 2

WDV (Writtten Down Value of Equipment on 1st Jan2018 ) -

Partculars	Amount
Purchase Price on 1st Jan 2015	$1,00,000
Less Depreciaton for 3 years
$9,300 (as per workng 1) * 3 Years	$27,900
WDV on 1st Jan2018	$72,100

Jornal entry for Sale of equipment from Hulk to Spiderman (n the books of Hulk)

Particulars	Debit	Credit
12% Note a/c	$ 81,000.00
Accumulated Depreciaton a/c	$ 27,900.00
Equipment a/c		$ 100,000.00
Profit on sale of equipment		$      8,900.00
(Being Sale of Equipment)

b. Journal Entry n the books of Spiderman

Particulars	Debit	Credit
Equipment a/c	$ 90,720.00
12% Note a/c		$    81,000.00
Interest Payable a/c		$      9,720.00
(Being Purchase of equipment from Hulk of Equipment)

Note: it is assumed that the equipment being a qualifying asset. Hence, interest cost of $ 9,720 capitalised, therefore total asset capitalization is ($81,000+$9,720)

d.consolidate income of both parties

in the year 2018, no consolidated statement are prepared because the merger /acquisition happen in the year of 2020 from that F.Y onwards consolidated statement was prepared.

e. worksheet entries in the year of 2019

in the books of Hulk

Particulars	Debit	Credit
profit on sale of eqiupment	$    8,900.00
P&L a/c		$      8,900.00
(Being trasfer the profit on sale of asset to P&L )

Particulars	Debit	Credit
Bank A/c	$ 90,720.00
12% note Bills Payable a/c		$    81,000.00
Other Comprehensive income a/c (Interest portion)		$      9,720.00
(Being receipt from Spiderman on account of asset purchase)

in the books of spiderman

Particulars	Debit	Credit
12% note Bills Payable a/c	$ 81,000.00
Interest Payable a/c	$    9,720.00
Bank		$    90,720.00
(Being Payment to hulk on accont of asset purchase)

Particulars	Debit	Credit
Depriciaton a/c	$ 12,389.00
Equipment a/c		$    12,389.00
(Being Depreciation provided on Equipment)

f.

Workings

Particulars	Amount
Purchase Price on 1st Jan 2018	$90,720.00
Less Depreciaton for 3 years
($12389*3 Years)	$37,167
WDV on 2021	$53,553

Particulars	Debit	Credit
Cash /Bank a/c	$ 57,000.00
Accmulated Depreciation a/c	$ 37,167.00
Equipment a/c		$    90,720.00
Profit on sale of Equipment		$      3,447.00
(Being Sale of Equipment to Aquaman)

g Consoldate Income

total consolidate income of both parties is $ 7,48,000