Question

Parson Company acquired an 80 percent interest in Syber Company on January 1, 2017. Any portion of Syber's business fair value in excess of its corresponding book value was assigned to trademarks. This intangible asset has subsequently undergone annual amortization based on a 15-year life. Over the past two years, regular intra-entity inventory sales transpired between the two companies. No payment has yet been made on the latest transfer. All dividends are paid in the same period as declared.

The individual financial statements for the two companies as well as consolidated totals for 2018 follow:

	Parson Company				Syber Company				Consolidated Totals
Sales	$	(980,000	)		$	(780,000	)		$	(1,604,000	)
Cost of goods sold		590,000				490,000				937,000
Operating expenses		136,000				154,000				292,500
Income of Syber		(101,800	)			0				0
Separate company net income	$	(355,800	)		$	(136,000	)
Consolidated net income									$	(374,500	)
Net income attributable to noncontrolling interest										18,700
Net income attributable to Parson Company									$	(355,800	)
Retained earnings, 1/1/18	$	(638,600	)		$	(326,000	)		$	(638,600	)
Net income (above)		(355,800	)			(136,000	)			(355,800	)
Dividends declared		67,000				48,000				67,000
Retained earnings, 12/31/18	$	(927,400	)		$	(414,000	)		$	(927,400	)
Cash and receivables	$	478,000			$	98,000			$	550,400
Inventory		208,000				196,000				385,500
Investment in Syber Company		443,400				0				0
Land, buildings, and equipment		416,000				314,000				730,000
Trademarks		0				0				32,500
Total assets	$	1,545,400			$	608,000			$	1,698,400
Liabilities	$	(360,000	)		$	(117,000	)		$	(417,400	)
Common stock		(210,000	)			(77,000	)			(210,000	)
Additional paid-in capital		(48,000	)			0				(48,000	)
Noncontrolling interest in Syber		0				0				(95,600	)
Retained earnings (above)		(927,400	)			(414,000	)			(927,400	)
Total liabilities and equities	$	(1,545,400	)		$	(608,000	)		$	(1,698,400	)

What method does Parson use to account for its investment in Syber?

What is the balance of the intra-entity inventory gross profit deferred at the end of the current period?

What amount was originally allocated to the trademarks?

What is the amount of the current year intra-entity inventory sales?

Were the intra-entity inventory sales made upstream or downstream?

What is the balance of the intra-entity liability at the end of the current year?

What amount of intra-entity gross profit was deferred from the preceding period and recognized in the current period?

What was the ending Noncontrolling Interest in Syber Company computed?

With a tax rate of 40 percent, what income tax journal entry is recorded if the companies prepare a consolidated tax return?

With a tax rate of 40 percent, what income tax journal entry is recorded if these two companies prepare separate tax returns?

Answer 1

1. Parson company uses consolidation method to account for its investment in syber company.

2. Intra entity inventory gross profit deffered at the end of current period -

Inventory of parson company - 208000

Inventory of syber company - 196000

Total - 404000

Less - consolidated inventory - (385500)

Gross profit deffered - 18500

3. Balance useful life of trademarks - 13 years

Balance value of trademarks - 32500

Per year amortisation of trademarks - 32500/13 = 2500

Orginal value of trademarks = 32500 + 2500*2= 32500 + 5000 = 37500

4. Total sales of parson and syber = 1706000

Less: consolidated totals = (1604000)

Intra entity sales = 156000

5. Intra entity sales were made upstream by syber company to parson company as intra entity net income adjustments were made to income of syber company.

6. Intra entity liability = 360000 + 117000 - 417400 = 60600

7. Intra entity sales for current year = 156000

Intra entity cost of goods sold. = (143000)

Intra entity gross profit for current year = 13000

Intra entity inventory gross profit = 18500

Intra entity gross profit for previous year = 18500 - 13000 = 5500

8. Non controlling interest in syber

Retained earnings as in jan 1 2018 = 326000

Less - gross profit deffered for previous year = 5500

Adjusted retained earnings as on jan 1 2018 = 320500

Non controlling interesrt = 20% of 320500 = 64100

Net income of non controlling interest after dividend = 18700 - 9600 = 9100

Retained earnings as on dec 31 = 64100+ 9100 = 73200

Equity as on dec 31 = 77000/5 = 15400

Total non controlling interest = 88600

9. Consolidated income of parson = 355800 * 40% = 142320

Journal entry

Consolidated profit and loss . Dr. 142320

To income tax. 142320

10. Separate tax returns

Parson company tax = 254000*40% = 101600

Profit and loss. Dr. 101600

To incone tax 101600

Syber company income tax = 136000*40% = 54400

Profit and loss. Dr. 54400

To income tax. 54400