Question

Prince Corporation holds 75 percent of the common stock of Sword Distributors Inc., purchased on December 31, 20X1, for $2,220,000. At the date of acquisition, Sword reported common stock with a par value of $950,000, additional paid-in capital of $1,300,000, and retained earnings of $550,000. The fair value of the noncontrolling interest at acquisition was $740,000. The differential at acquisition was attributable to the following items:

Inventory (sold in 20X2)	$	40,000
Land		56,000
Goodwill		64,000
Total Differential	$	160,000

During 20X2, Prince sold a plot of land that it had purchased several years before to Sword at a gain of $22,400; Sword continues to hold the land. In 20X6, Prince and Sword entered into a five-year contract under which Prince provides management consulting services to Sword on a continuing basis; Sword pays Prince a fixed fee of $85,000 per year for these services. At December 31, 20X8, Sword owed Prince $21,250 as the final 20X8 quarterly payment under the contract.

On January 2, 20X8, Prince paid $240,000 to Sword to purchase equipment that Sword was then carrying at $280,000. Sword had purchased that equipment on December 27, 20X2, for $420,000. The equipment is expected to have a total 15-year life and no salvage value. The amount of the differential assigned to goodwill has not been impaired.

At December 31, 20X8, trial balances for Prince and Sword appeared as follows:

	Prince Corporation									Sword Distributors Inc.
Item	Debit				Credit					Debit				Credit
Cash		$	64,700								$	52,000
Current Receivables			105,800									93,400
Inventory			288,000									220,900
Investment in Sword Distributors			2,910,100
Land			408,000									1,207,000
Buildings & Equipment			2,440,000									3,040,000
Cost of Goods Sold			2,191,000									513,000
Depreciation & Amortization			195,000									71,000
Other Expenses			1,366,000									217,000
Dividends Declared			42,000									12,000
Accumulated Depreciation						$	1,090,000								$	417,000
Current Payables							89,200									255,300
Bonds Payable							902,000									187,000
Common Stock							94,000									950,000
Additional Paid-in Capital							1,270,000									1,300,000
Retained Earnings, January 1							1,466,800									1,350,000
Sales							4,850,100									992,000
Other Income or Loss							97,000					25,000
Income from Sword Distributors							151,500
Total		$	10,010,600			$	10,010,600				$	5,451,300			$	5,451,300

As of December 31, 20X8, Sword had declared but not yet paid its fourth-quarter dividend of $5,000. Both companies use straight-line depreciation and amortization. Prince uses the fully adjusted equity method to account for its investment in Sword.

Required:
a. Compute the amount of the differential as of January 1, 20X8.
  

b. Verify the balance in Prince’s Investment in Sword Distributors account as of December 31, 20X8.
  

c. Present all consolidation entries that would appear in a three-part consolidation worksheet as of December 31, 20X8. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your answers to nearest whole dollar amount.)
  

d. Prepare and complete a three-part worksheet for the preparation of consolidated financial statements for 20X8. (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

ANSWER

Part A

Computation of differential as of January 1, 20X8:

Original differential at December 31, 20X1	160000
Less: Portion written off for sale of inventory	(40000)
Remaining differential, January 1, 20X8	$120000

Part B

Verification of balance in Investment in Sword Stock account:

Sword retained earnings, January 1, 20X8		1350000
Sword net income, 20X8
Sales	992000
Cost of goods sold	(513000)
Depreciation and amortization	(71000)
Other expenses	(217000)
Other income (loss)	(25000)
Net income		166000
Sword dividends, 20X8		(12000)
Sword retained earnings, December 31, 20X8		1504000
Sword stockholders' equity:
Common stock		950000
Additional paid-in capital		1300000
Retained earnings, December 31, 20X8		1504000
Stockholders' equity, December 31, 20X8		3754000
Prince's ownership share		75%
Book value of shares held by Prince		2815500
Remaining differential at January 1, 20X8 (120000*75%)		90000
Balance in Investment in Sword Stock account, December 31, 20X8		$2905500

Part C

Entry	General journal	Debit	Credit
E(1)	Common Stock — Sword	950000
	Additional Paid-In Capital	1300000
	Retained Earnings, January 1	1350000
	Differential	120000
	Investment in Sword Stock		2790000
	Noncontrolling Interest (950000+1300000+1350000+120000)*25%		930000
	Record basic consolidation entry
E(2)	Income from Subsidiary (166000*75%)	124500
	Dividends declared (12000*75%)		9000
	Investment in Sword Stock		115500
	Eliminate income from subsidiary.
E(3)	Income to Noncontrolling Interest (166000*25%)	41500
	Dividends Declared (12000*25%)		3000
	Noncontrolling Interest		38500
	Assign income to noncontrolling interest
E(4)	Land	56000
	Goodwill	64000
	Differential		120000
	Assign differential
E(5)	Retained earnings, January 1	22400
	Land		22400
	Eliminate unrealized gain on land
E(6)	Buildings and Equipment (420000-240000)	180000
	Depreciation and Amortization (420000/15)-(240000/10)	4000
	Accumulated Depreciation (420000/15*5)+4000		144000
	Other Income (Loss on Sale of Equipment) (280000-240000)		40000
	Eliminate unrealized loss on equipment
E(7)	Other Income	85000
	Other Expenses		85000
	Eliminate inter company sale of services
E(8)	Current Payables	21250
	Current Receivables		21250
	Eliminate inter company receivable/payable
E(9)	Current Payables	2438
	Current Receivables (3250*75%)		2438
	Eliminate inter company dividend owed

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