Question

On January 1, 2018, Sledge had common stock of $250,000 and retained earnings of $390,000. During that year, Sledge reported sales of $260,000, cost of goods sold of $135,000, and operating expenses of $53,000.

On January 1, 2016, Percy, Inc., acquired 80 percent of Sledge's outstanding voting stock. At that date, $73,000 of the acquisition-date fair value was assigned to unrecorded contracts (with a 20-year life) and $33,000 to an undervalued building (with a 10-year remaining life).

In 2017, Sledge sold inventory costing $16,800 to Percy for $28,000. Of this merchandise, Percy continued to hold $7,000 at year-end. During 2018, Sledge transferred inventory costing $18,150 to Percy for $33,000. Percy still held half of these items at year-end.

On January 1, 2017, Percy sold equipment to Sledge for $18,500. This asset originally cost $29,000 but had a January 1, 2017, book value of $11,600. At the time of transfer, the equipment's remaining life was estimated to be five years.

Percy has properly applied the equity method to the investment in Sledge.

A.Prepare worksheet entries to consolidate these two companies as of December 31, 2018.

B. Compute the net income attributable to the noncontrolling interest for 2018.

A.

Prepare Entry *G to remove the intra-entity gross profit from the beginning account balances.

Note: Enter debits before credits.

Transaction Accounts Debit Credit 1 Prepare Entry *TA to adjust the equipment balance to the original cost and to adjust the accumulated depreciation to the consolidated January 1, 2018 balance. Note: Enter debits before credits. Transaction Accounts Debit Credit 2 Prepare Entry S to eliminate the subsidiary's stockholders' equity accounts and to recognize the noncontrolling interest balance as of January 1, 2018. Note: Enter debits before credits. Transaction Accounts Debit Credit 3

Prepare Entry A to recognize acquisition-date fair value allocations adjusted for 2 years of amortization.

Note: Enter debits before credits.

Transaction Accounts Debit Credit 4 Prepare Entry I to remove the parent's equity method income. Note: Enter debits before credits. Transaction Accounts Debit Credit 5 Prepare Entry E to recognize 2018 excess amortization. Note: Enter debits before credits. Transaction Accounts Debit Credit 6 Prepare Entry TI to eliminate the intra-entity inventory tranfers during 2018. Note: Enter debits before credits. Transaction Accounts Debit Credit 7 Prepare Entry G to remove the intra-entity gross profit from the ending account balances. Note: Enter debits before credits. Transaction Accounts Debit Credit 8 Prepare Entry ED to eliminate the excess depreciation on equipment recorded at transfer price. Note: Enter debits before credits. Transaction Accounts Debit Credit 9

Answer 1

A. Worksheet entries to consolidate these two companies as of December 2018.
1. Entry *G to remove the intrs entity gross profit from the beginning account balances
	Retained Earning 1/1/2018	$2,800
	Cost of Goods sold		$2,800
Gross profit margin = (28000-16800)/28000 = 40%
Unrealised gross profit margin = $7000 x 40% = $2800
2. Entry *TA to adjust the equipment balance to the original cost and to adjust accumulated depreciation
to the consolidated January 1, 2018 balance
	Equipment	$10,500
	Investment in Sledge	$6,900
	Accumulated Depreciation		$17,400
Equipment = $29000-$18500 = $10500
Accumulated depreciation = $29000 - $11600 = $17400
3. Entry S to eliminate the subsidiary stockholder's equity accounts and to recognize the noncontrolling
interest balance as of Jan 1, 2018
	Common Stock	$250,000
	Retained earning (adjusted)	$387,200
	Investment in Sledge		$509,760
	Non controlling interest		$127,440
4. Entry A to recognize acquisition date fair value allocations adjusted for 2 years of amortization
	Contracts	$65,700
	Building	$26,400
	Investment in Sledge (80%)		$73,680
	Non controlling Interest (20%)		$18,420
Contracts = $73000 - $3650-$3650 = $65700
Building = $33000 - $3300 - $3300 = $26400
5. Entry I to remove parent's equity method income
	Equity income of Subsidiary	$50,936
	Investment in Sledge		$50,936
Equity income of Subsidiary
	Sales	$260,000
	Cost of goods sold	($135,000)
	Operating expenses	($53,000)
	Depreciation on Equipment	($1,380)
	Amortization of Contracts	($3,650)
	Depreciation of Building	($3,300)
	Net Income	$63,670
	Non controlling interest (20%)	$12,734
	Equity income of Subsidiary	$50,936
6. Entry E to reognize 2018 excess amortization
	Depreciation	$3,300
	Amortization	$3,650
	Building		$3,300
	Contracts		$3,650
7. Entry TI to eliminate the intra entity inventory transfer during 2018
	Sales	$33,000
	Cost of Goods Sold		$33,000
8. Entry G to remove the intra entity gross profit from the ending account balances
	Cost of Goods Sold	$7,425
	Inventory		$7,425
Gross profit margin = (33000-18150)/33000 = 45%
Unrealised gross profit margin = $16500 x 45% = $7425
9. Entry ED to eliminate the excess depreciation on equipment recorded at transfer price
	Accumulated Depreciation	$1,380
	Depreciation		$1,380
Depreciation = (18,500-11,600)/5 = $1380
B. Net income attributable to the non controlling interest for 2018
	Non controlling interest (20%)	$12,734