Question

On January 1, 2019, Monica Company acquired 70 percent of Young Company’s outstanding common stock for $700,000. The fair value of the noncontrolling interest at the acquisition date was $300,000.

Young reported stockholders’ equity accounts on that date as follows:

Common stock—$10 par value	$	100,000
Additional paid-in capital		100,000
Retained earnings		520,000

In establishing the acquisition value, Monica appraised Young's assets and ascertained that the accounting records undervalued a building (with a five-year remaining life) by $40,000. Any remaining excess acquisition-date fair value was allocated to a franchise agreement to be amortized over 10 years.

During the subsequent years, Young sold Monica inventory at a 30 percent gross profit rate. Monica consistently resold this merchandise in the year of acquisition or in the period immediately following. Transfers for the three years after this business combination was created amounted to the following:

Year	Transfer Price			Inventory Remaining at Year-End (at transfer price)
2019	$	60,000		$	21,000
2020		80,000			23,000
2021		90,000			29,000

In addition, Monica sold Young several pieces of fully depreciated equipment on January 1, 2020, for $47,000. The equipment had originally cost Monica $72,000. Young plans to depreciate these assets over a five-year period.

In 2021, Young earns a net income of $250,000 and declares and pays $80,000 in cash dividends. These figures increase the subsidiary's Retained Earnings to a $850,000 balance at the end of 2021. During this same year, Monica reported dividend income of $56,000 and an investment account containing the initial value balance of $700,000. No changes in Young's common stock accounts have occurred since Monica's acquisition.

1. Prepare the 2021 consolidation worksheet entries for Monica and Young.

2. Compute the net income attributable to the noncontrolling interest for 2021

.

Answer 1

Calculation of Franchise agreement on acquisition
Consideration transferred by Monica to young for 70% of share	700,000
Fair value of Non controlling interest	300,000
Total fair value of Company	1,000,000
Less: Book Value
Common stock	-100,000
Additional paid in capital	-100,000
Retained earnings	-520,000
Excess of fair value over book value	280,000
Excess fair value assign to:
building	40,000
franchise agreement (Balance)	240,000

Depreciation/Amortization of ExcesE value of assets acquire
Assets	Value as on 1/1/16 (A)	Lifee in years (B)	Amortization per year C= (A/B]	Value as on 12/31/2016 D=(A-C)	Value as on 12/31/2017 E=(D-C)	Value as on 12/31/2018 F=(E-C)
Building	40000	5	8000	32000	24000	16000
Franchise agreement	240000	10	24000	216,000	192,000	168,000
Total	280,000		32000	2,480,000	216000	184000
Monica Share 70%
	Value as on 1/1/16 (A)	Lifee in years (B)	Amortization per year C= (A/B]	Value as on 12/31/2016 D=(A-C)	Value as on 12/31/2017 E=(D-C)	Value as on 12/31/2018 F=(E-C)
Building	28000	5	5600	22400	16800	11200
Franchise agreement	168000	10	16800	151200	134400	117600
	196000		22400	173600	151200	128800
NCI 3O%
Assets	Value as on 1/1/16 (A)	Lifee in years (B)	Amortization per year C= (A/B]	Value as on 12/31/2016 D=(A-C)	Value as on 12/31/2017 E=(D-C)	Value as on 12/31/2018 F=(E-C)
Building	12000	5	2400	9600	7200	4800
	72000	10	7200	64800	57600	50400

Calculation of Deferred profit on intra company sale
Inventory Transfer (Upstream)
Year	Inventory remaining at year end (A)	Profit % (B)	Deferred Profit C=(A+B)
2017	23,000	30%	6900
2018	29,000	30%	8700
Equipment transfer (Downstream)
Gain on sale of equipment 1/1/2017	47000
LIFE	5
xcess Depreciation per year (47,000/5)	9400
Deferred Gain on equipment 1/1/2018
Gain on sale of equipment 1/1/2017	47000
Less: Depreciation on equipment per year		9400
Deferred Gain on equipment 1/1/2018	37600
Calculation of Retained Earnings of Young as on 1/1/2018
Retained Earnings as on 12/31/2018	850000
Less: Net Income during the year 2018	250,000
Add: Dividend	80,000
Unadjusted Retained Earnings 1/1/2018	680,000
Less: Removal of deferred profit 1/1/2018	6,900
Adjusted Retained Earnings 1/1/2018	673,100

Consolidation Entries Worksheet
Entry	Account Titles and Explanation	Debit	Credit
C	investment Income	160,740
	Dividend (80000*70 %)		56000
	Investment in young		104,740
	(to eliminate the intra company accrual)
S	Equity Shares - Young	100000
	Additional Paid in capital - Young	100000
	Retained Earnings - Young (1/1/2018)	673100
	Investment in young (70%)		611,170
	Non Controlling Interest (30%)		261930
	(to eliminate the equity accounts of subsidiary and recognize non controlling interest)
A	Building	24000
	Franchise agreement	192000
	Investment in young (70%)		151200
	Non Controlling Interest (30%)		64800
	(to record the unamortized value of excess assets as on 1/1/2017)
D	Amortization Expense-Franchise agreement	24000
	Depreciation expense- Building	8000
	Building		8000
	Franchise Agreement		24000
	(to record the amortization and depreciation expense during the year 2021)
[Sales]	Sales	90,000
	Cost of goods sold		90,000
	(to eliminate the intra company inventory transfer during the year 2021)
[COGS]	Retained Earnings - Young (1/1/2021)	6900
	Cost of goods sold		6900
	(to recoginze the deferred profit on inventory as on 1/1/21)
[COGD-1]	Cost of goods sold	8700
	Inventory		8700
	(to eliminate the deferred profit on intra company inventory sold as on 12/31/2018)
		37600
[GAIN]	Investment in young	25000
	Equipment [72000-47000]		62600
	Accumulated Depreciation- Equipment [72000-9400]
	(to eliminate the gain on equipment sold as on 1/1/18 and bring back the beginning book value based on historical cost)