Question

Proud Corporation acquired 80 percent of Spirited Company’s voting stock on January 1, 20X3, at underlying book value. The fair value of the noncontrolling interest was equal to 20 percent of the book value of Spirited at that date. Assume that the accumulated depreciation on depreciable assets was $44,000 on the acquisition date. Proud uses the equity method in accounting for its ownership of Spirited. On December 31, 20X4, the trial balances of the two companies are as follows:
  

		Proud Corporation								Spirited Company
Item	Debit				Credit				Debit					Credit
Current Assets		$	248,000							$	155,000
Depreciable Assets			500,000								316,000
Investment in Spirited Company			140,320
Depreciation Expense			21,000								11,000
Other Expenses			145,000								83,000
Dividends Declared			51,000								28,600
Accumulated Depreciation						$	197,000							$	66,000
Current Liabilities							70,000								50,000
Long-Term Debt							94,720								179,600
Common Stock							193,000								91,000
Retained Earnings							277,000								61,000
Sales							232,000								146,000
Income from Spirited Company							41,600
		$	1,105,320			$	1,105,320			$	593,600			$	593,600

Required:
a. Prepare all consolidation entries required on December 31, 20X4, to prepare consolidated financial statements. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

b. Prepare a three-part consolidation worksheet as of December 31, 20X4. (Values in the first two columns (the "parent" and "subsidiary" balances) that are to be deducted should be indicated with a minus sign, while all values in the "Consolidation Entries" columns should be entered as positive values. For accounts where multiple adjusting entries are required, combine all debit entries into one amount and enter this amount in the debit column of the worksheet. Similarly, combine all credit entries into one amount and enter this amount in the credit column of the worksheet.)

Answer 1

a. Prepare all consolidation entries required on December 31, 20X4, to prepare consolidated financial statements.

Answer:

Event	General Journal	Debit	Credit
1	Common Stock Spirited Co	91,000
	Retained Earnings	61,000
	Income from Spirited Company	41,600
	NCI in NI of Spirited Company	10,400
	Dividends Declared		28,600
	Investment in Spirited Company		140,320
	NCI in NA of Spirited Company		35,080
	To record the basic consolidation entry
2	Accumulated Depreciation	44,000
	Depreciable Assets		44,000
	To record the accumulated depreciation consolidation entry

b. Prepare a three-part consolidation worksheet as of December 31, 20X4.

PROUD CORPORATION AND SUBSIDIARY
Worksheet for Consolidated Financial Statements
	Proud Corporation	Spirited Company	Debit	Credit	Consolidated
Income Statement
Sales	232,000	146,000			378,000
Less: Depreciation expense	(21,000)	(11,000)			(32,000)
Less: Other expense	(145,000)	(83,000)			(228,000)
Income from Spirited Company	41,600	-	41,600		-
Consolidated Income	107,600	52,000	41,600	-	118,000
NCI in net income			10,400		(10,400)
Controlling Interest in Net Income	107,600	52,000	52,000		107,600
Statement of Retained Earnings
Beginning balance	277,000	61,000	61,000		277,000
Net income	107,600	52,000	52,000		107,600
Less: Dividend declared	(51,000)	(28,600)		28,600	(51,000)
Ending Balance	333,600	84,400	113,000	28,600	333,600
Balance Sheet
Current Assets	248,000	155,000			403,000
Depreciable assets	500,000	316,000		44,000	772,000
Less: Accumulated depreciation	(197,000)	(66,000)	44,000		(219,000)
Investment in Spirited Company	140,320			140,320	-
Total Assets	691,320	405,000	44,000	184,320	956,000
Liabilities and equity
Current Liabilities	70,000	50,000			120,000
Long-term debt	94,720	179,600			274,320
Common stock	193,000	91,000	91,000		193,000
Retained earnings	333,600	84,400	113,000	28,600	333,600
NCI in NA of Spirited Company				35,080	35,080
Total Liabilities and equity	691,320	405,000	204,000	63,680	956,000

Calculation:

1.

To prepare the  consolidation entries required on December 31, 20X4, to prepare consolidated financial statements, first we need to prepare the basic consolidation entry. Since proud company acquired the Spirit company, we need to debit the Common Stock, Retained Earnings, Income from Spirited Company, and NCI in NI of Spirited Company as that is received to the Proud company.

The NCI in NI of Spirited Company = 41600 / 80% * 20% = 10,400

Then we need to credit the Dividends Declared by Spirited Co. Then we need to find the Investment in Spirited Company and NCI in NA of Spirited Company

Investment in Spirited Company = (91000 + 61000 + 41600 + 10400 - 28600) x 80% = 140,320

NCI in NA of Spirited Company= (91000 + 61000 + 41600 + 10400 - 28600) x 20% = 35,080

Then we need to prepare the accumulated depreciation consolidation entry, we need to debit the accumulated depreciation and credit the Depreciable Assets as the accumulated depreciation is written off

Then we need to report these entries to the Worksheet for Consolidated Financial Statements. Here we need to first prepare the income statement part and then we need to debit the amount of Income from Spirited Company and NCI in net income to show in the consolidation. While preparing the retained earnings we need to credit the dividends declared. So likewise we need to report the post entries to the statement. For balance sheet we need to report the entry 2 optional accumulated depreciation of 44000 by debiting it in Accumulated depreciation and crediting in Depreciable assets. Common stock of spirited company is debited and also repeat the retained earnings part as in Income statement.