Question

On January 1, 2018, Sledge had common stock of $280,000 and retained earnings of $420,000. During that year, Sledge reported sales of $290,000, cost of goods sold of $150,000, and operating expenses of $56,000.

On January 1, 2016, Percy, Inc., acquired 70 percent of Sledge's outstanding voting stock. At that date, $76,000 of the acquisition-date fair value was assigned to unrecorded contracts (with a 20-year life) and $36,000 to an undervalued building (with a 10-year remaining life).

In 2017, Sledge sold inventory costing $21,700 to Percy for $31,000. Of this merchandise, Percy continued to hold $5,000 at year-end. During 2018, Sledge transferred inventory costing $21,600 to Percy for $36,000. Percy still held half of these items at year-end.

On January 1, 2017, Percy sold equipment to Sledge for $20,000. This asset originally cost $32,000 but had a January 1, 2017, book value of $12,200. 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.

1. Prepare journal entries to consolidate these two companies as of December 31, 2018.
2. Compute the net income attributable to the noncontrolling interest for 2018.

Answer 1

Answer:

a. Journal Entries:

No.	General Journal	Debit	Credit
1	Retained earnings	1,500
	Cost of goods sold		1,500
	To remove intra-entity gross profit from beginning account balances.
2	Equipment	12,000
	Investment in Sledge	6,240
	Accumulated depreciation		18240
	To adjust the equipment balance to original cost 32,000 and to adjust accumulated depreciation to the consolidated January 1, 2018 balance
3	Common stock	280,000
	Retained earnings	418,500
	Investment in Sledge		488950
	Noncontrolling interest in Sledge		209550
	To eliminate subsidiary's stockholders' equity accounts and recognize noncontrolling interest balance as of January 1, 2018.
4	Contracts	68,400
	Buildings	28,800
	Investment in Sledge		68040
	Noncontrolling interest in Sledge		29,160
	To recognize acquisition-date fair value allocations adjusted for 2 years of amortization
5	Equity in income of Sledge	51,190
	Investment in Sledge		51,190
	To remove parent’s equity method income
6	Depreciation expense	3,600
	Amortization expense	3,800
	Contracts		3,800
	Buildings		3,600
	To recognize 2018 excess amortizations.
7	Sales	36,000
	Cost of goods sold		36,000
	To eliminate intra-entity inventory transfers during 2018.
8	Cost of goods sold	7,200
	Inventory		7,200
	To remove intra-entity gross profit from ending account balances
9	Accumulated depreciation	1560
	Depreciation expense		1560
	To eliminate excess depreciation on equipment recorded at transfer price.

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

Net income attributable to noncontrolling interest

$21,270

Calculation:

a.

Explanation for Journal Entries

Entry #1:

To remove intra-entity gross profit from beginning account balances.

Gross profit rate = (31,000 - 21,700)/31,000 = 30%

So, 30% * remaining inventory 5,000 = 1,500

Entry #2:

Equipment cost = 32,000

Book value = 12,200

Cost - Book Value =32,000 - 12,200 = 19,800

Extra depreciation = Equipment sale price - Book Value / Life =20,000 - 12,200 = 7,800 / 5 = 1,560

Accumulated depreciation to the consolidated January 1, 2018 balance = $19,800 -$1,560 = 18,240
The Investment account was reduced by $7,800 in 2017 for the original intra-entity gain and increased
by $1,560 in 2017 for the extra depreciation ($4,200 gain ÷ 5 years) through application of the equity method.

Investment in Sledge = 7,800 - 1,560 = 6,240

Equipment = cost - Sale Price = 32,000 - 20,000 = 12,000

Entry #3:

Common stock = 280,000

Retained earnings = 420,000 - 1,500 = 418,500

Investment in Sledge = 418,500 + 280,000 * 70% = 488,950

Entry #4:

Contracts = 76,000 / 20 = 3,800

So remaining Life will be = 20 -2 = 18

Amortization expense = 3,800 * 18 = 68,400

Buildings = 36,000/ 10 = 3,600

So remaining Life will be = 10 -2 = 8

Amortization expense = 3,600 * 8 = 28,800

Investment in Sledge = 68,400+ 28,800 * 70% = 68040

Entry #5:

Subsidiary reported net income		84,000
Recognize upstream intra-entity gross profit in beg. inventory
Intra-entity inventory year-end 2017 (upstream)	5,000
Gross profit rate ((31,000 - 21,700)/31,000	30%
Intra-entity gross profit in 2018 beginning inventory		1,500
Defer upstream intra-entity gross profit in ending inventory
Intra-entity inventory year-end 2018 (upstream) (36,000/2)	18,000
Gross profit rate ($36000 -21600 ) / 36000	40%
Intra-entity gross profit in 2018 ending inventory		(7,200)
Excess amortization (3800+3600)		(7,400)
2018 adjusted subsidiary net income		70,900
Parent’s ownership percentage		70%
Parent’s share of subsidiary adjusted net income		49,630
Depreciation adjustment from 2017 downstream fixed asset sale		1,560
Intra-entity gain recognition from downstream fixed asset sale: (( 20000 - 12,200) / 5)
Parent’s recorded 2018 equity income from subsidiary		51,190

Entry #6:

Depreciation expense = 36,000/ 10 = 3,600

Amortization expense = 76,000 / 20 = 3,800

Entry #8:

Inventory Cost = 21600

Inventory Sale price = 36,000

So, 36,000 - 21600 = 14,400

So Gross profit rate 2018 = 14,400/36,000 = 40%

Remaining inventory = 36,000/2 = 18,000

(40% gross profit rate * remaining inventory ($18,000) = 7,200

Entry #9:

Equipment Sales price = 20,000

Book Value = 12,200

Life = 5 years

So,

Depreciation expense = (20,000 - 12,200)/5 = 1,560

b.

Calculation for Net income attributable to noncontrolling interest

Revenues	290,000
Less: Cost of goods sold	(150,000)
Less: Other expenses	(56,000)
Less: Excess acquisition-date fair value amortization (3,800 + 3,600)	(7,400)
Net income adjusted for amortization	76,600
Gross profit on 2017 upstream inventory transfer recognized in 2018 (5,000* 30%)	1,500
Less: Gross profit on 2018 upstream inventory transfer deferred until 2019 (18,000 * 40%)	(7,200)
Adjusted net income of subsidiary—2018 (a)	70,900
Outside ownership (100 % - 70%) (b)	30%
Net income attributable to noncontrolling interest (a) * (b)	21,270