Question

C3.       On January 1, 2020, Wondersome Company acquired a 70% interest in Philmore Company for a purchase price that was $240,000 over the book value of the Philmore’s Stockholders’ Equity on the acquisition date. Wondersome uses the cost method to account for its investment in Philmore. On the date of acquisition, Philmore’s retained earnings balance was $350,000. Wondersome assigned the acquisition-date AAP as follows:

AAP Items	Initial Fair Value	Useful Life (years)
PPE, net	90,000	20
Patent	150,000	10
	$350,000

Philmore sells inventory to Wondersome (upstream) which includes that inventory in products that it, ultimately, sells to customers outside of the controlled group. You have compiled the following data for the years ending 2022 and 2023:

	2022	2023
Transfer price for inventory sale	$94,500	$70,000
Cost of goods sold	-64,500	-45,000
Gross profit	$30,000	$25,000
% inventory remaining	30%	20%
Gross profit deferred	$9,000	$5,000
EOY Receivable/Payable	$32,000	$29,500

The inventory not remaining at the end of the year has been sold outside of the controlled group.

The parent and the subsidiary report the following financial statements at December 31, 2023:

Income Statement
	Wondersome	Philmore
Sales	$2,400,000	$602,400
Cost of goods sold	-1,580,000	-465,398
Gross Profit	820,000	137,002
Income (loss) from subsidiary	10,500
Operating expenses	-711,200	-56,000
Net income	$119,300	$81,002

Statement of Retained Earnings
	Wondersome	Philmore
BOY Retained Earnings	$3,360,350	$608,000
Net income	119,300	81,002
Dividends	-85,000	-15,000
EOY Retained Earnings	$3,394,650	$674,002

Balance Sheet
	Wondersome	Philmore
Assets:
Cash	$450,000	$84,700
Accounts receivable	425,000	113,200
Inventory	654,000	142,100
Investment in subsidiary	634,550
PPE, net	4,432,100	1,000,002
	$6,595,650	$1,340,002
Liabilities and Stockholders’ Equity:
Current Liabilities	$505,900	$99,500
Long-term Liabilities	703,500	250,000
Common Stock	402,000	75,300
APIC	1,589,600	241,200
Retained Earnings	3,394,650	674,002
	$6,595,650	$1,340,002

Required

1. Compute the EOY noncontrolling interest equity balance
2. Prepare the consolidation journal entries.

Answer 1

	Workings
1	Group Structure
	Wondersome
	70%
	Philmore
2	Net Assets of Philmore
			End of reporting period	Acquisition	Post Acquisition
	Common stock		75,300	75,300	0
	APIC		241,200	241,200	0
	Retained Earnings		674,002	350,000	324,002
	unrealized profit in Inv		(5,000)		-5,000
	Dividend received		15,000		15,000
			1,000,502	666,500	334,002
3	Goodwill
	Cost of shares				634,550
	Non-controlling interest (666,500*30%)				199,950
	Less: Net Assets acquired				-666,500
	Goodwill				168,000
4	Non-controlling interest
	Fair Value on acquisition				199,950
	Share of post- acquisistion profit (334,002*30%)				100,201
					300,151
5	Retained Earnings
	Wondersome (After adjusting dividend)				3,379,650
	Philmore				233,801
					3,613,451
	Consolidated Balance sheet of Wondersome as on 31 Dec 2023
	Assets		Wondersome	Philmore	Consolidated
	Cash		450,000	84,700	534,700
	Accounts receivable		425,000	83,700	508,700
	Inventory		649,000	142,100	791,100
	PPE NET		4,432,100	1,000,002	5,432,102
	Goodwill (W 3)				168,000
					7,434,602
	Liabilities
	Accounts Payable		476,400	99,500	575,900
	Long term liabilities		703,500	250,000	953,500
	Common stock		402,000		402,000
	APIC		1,589,600		1,589,600
	Retained Earnings (W 5)				3,613,451
	Non-Controlling Interest (W 4)				300,151
					7,434,602	-
	Journal Entry to be booked for consolidation as on 31.12.2023
	Goodwill a/c	Dr	168,000
	Net assets acquired	Dr	666,500
	Investments a/c	Cr	634,550
	Non-controlling interest	Cr	199,950
	Accounts Payable	Dr	29,500
	Accounts Receivable	Cr	29,500
	Retained Earnings	Dr	5,000
	Inventory	Cr	5,000