Question

The individual financial statements for Gibson Company and Keller Company for the year ending December 31, 2018, follow. Gibson acquired a 60 percent interest in Keller on January 1, 2017, in exchange for various considerations totaling $570,000. At the acquisition date, the fair value of the noncontrolling interest was $380,000 and Keller’s book value was $850,000. Keller had developed internally a customer list that was not recorded on its books but had an acquisition-date fair value of $100,000. This intangible asset is being amortized over 20 years. Gibson sold Keller land with a book value of $60,000 on January 2, 2017, for $100,000. Keller still holds this land at the end of the current year. Keller regularly transfers inventory to Gibson. In 2017, it shipped inventory costing $100,000 to Gibson at a price of $150,000. During 2018, intra-entity shipments totaled $200,000, although the original cost to Keller was only $140,000. In each of these years, 20 percent of the merchandise was not resold to outside parties until the period following the transfer. Gibson owes Keller $40,000 at the end of 2018. Gibson Company Keller Company Sales $   (800,000) $   (500,000) Cost of goods sold 500,000   300,000   Operating expenses 100,000   60,000   Equity in earnings of Keller     (84,000)      –0–   Net income $    (284,000) $    (140,000) Retained earnings, 1/1/18 $(1,116,000) $    (620,000) Net income (above) (284,000) (140,000) Dividends declared     115,000         60,000   Retained earnings, 12/31/18 $(1,285,000) $    (700,000) Cash $  177,000   $   90,000   Accounts receivable 356,000   410,000   Inventory 440,000   320,000   Investment in Keller 726,000   –0–   Land 180,000   390,000   Buildings and equipment (net)    496,000      300,000   Total assets $  2,375,000   $ 1,510,000   Liabilities $   (480,000) $   (400,000) Common stock (610,000) (320,000) Additional paid-in capital –0–   (90,000) Retained earnings, 12/31/18   (1,285,000)    (700,000) Total liabilities and equities $(2,375,000) $(1,510,000) Prepare a worksheet to consolidate the separate 2018 financial statements for Gibson and Keller. How would the consolidation entries in requirement (a) have differed if Gibson had sold a building with a $60,000 book value (cost of $140,000) to Keller for $100,000 instead of land, as the problem reports? Assume that the building had a 10-year remaining life at the date of transfer.

Answer 1

Parent Uses the Partial Equity Method as we can see that the Equity income from Keller is 60% of the Net Income of Keller Net Income of Keller 140,000 Equity in earnings of Keller (140,000 x 60%) 84,000 Consideration transferred Fair Value of Non Controlling Interest Total Fair value of Keller's Book Value of Keller's Fair Value in Excess of Book Value 570,000 380,000 950,000 (850,000) 100,000 100,000 20 year Excess Fair Value Assigned to: Customer list Life Amortization per year (100,000/20) Parent Share's in amortization 5,000 x 60%) NCI in amortization (5,000 x 40%) 5,000 3,000 2,000 Unamortized Value of Customer list as on 1/1/2018 Customer list as on 1/1/2017 Less: Amortization during the year 2017 Unamortized Value of Customer list as on 1/1/2018 100,000 (5,000) 95,000 Profit on Inter Company sale of Land (downstream) Year 2017 Book Value of Land Sold (a) Sold price to Keller (b) Gain to Gibson( b-a) 60,000 100,000 40,000

Profit on Inter Company sale of Inventory (Upstream) Transfer Price (a) 150,000 200,000 350,000 Cost (b) 100,000 140,000 240,000 Year 2017 Year 2018 Gibson Share 60% on Deferred Profit (d * 60%) 6,000 7,200 13,200 Deferred Profit at Profit C= (b-a) year end d= (cx20%) 50,000 10,000 60,000 12,000 110,000 22,000 Non Controlling Interest Share 40% on Deferred Profit (d x 40%) 4,000 4,800 8,800

Debit Credit Consolidated Worksheet Entries Event Account titles and explanation Retained Earnings, 1/1/18 (Gibson) Land (to remove unrealized gain on intra-entity downstream transfer of land on 2017) (TL) 40,000 40,000 [G] 10,000 Retained Earnings, 1/1/18 (Keller) Cost of goods sold (to remove unrealized gain on intra-entity upstream transfer of inventory on 2017) 10,000 [c] 9,000 9,000 Retained Earnings, 1/1/18 (Gibson) Investment in Keller [to recognized the share in amortization expenses in 2017 i.e 3,000 and Share in unrealized gain on intra-entity transfer of inventory on 2017 i.e. 6,000) [s] 320,000 90,000 610,000 Common stock (Keller) Additional Paid in Capital (Keller) Retained Earnings, 1/1/18 (Keller) (620,000 - 10,000) Investment in Keller (60%) Non Controlling in Keller, 1/1/18 (40%) (to remove stockholders' equity accounts of Kellar and recognize beginning balance of Non controlling Interest at beginning. And Retained Earnings Beginning balance was adjusted with the Entry G) 612,000 408,000 84,000 Equity in earnings in Keller Investment in Keller [to eliminate intra-entity income accrual] 84,000

[A] 95,000 Customer List Investment in Keller (60%) Non Controlling Interest in Keller, 1/1/18 (40%) (to recognized the unamortized value of customer list as on 1/1/2018) 57,000 38,000 36,000 Investment in Kellar (60,000 x 60%) Dividend Declared [to eliminate intra-entity 60% dividend transfer) 36,000 5,000 Amortization expense Customer list (to record amortization expense during the year) 5,000 40,000 Liabilities Accounts receivable [to remove the intra entity debt] 40,000 (sales) 200,000 Sales Cost of goods sold [to eliminate the current year intra entity inventory transfer) 200,000 12,000 Cost of goods sold Inventory [to eliminate the defer 2018 unrealized inventory gross profit] 12,000

GIBSON AND KELLER Consolidated Worksheet For Year Ending December 31, 2018 Non Controlling Gibson Credit Consolidated Totals (1,100,000) 602,000 165,000 210,000 Accounts Sales Cost of goods sold Operating Expense Equity in earnings of Kellar Separate Net Income Consolidated Net Income Net Income attributable to NCI To Gibson Company Keller Debit (800,000)| (500,000) 200,000 500,000 300,000 12,000 100,000 60,000 5,000 (84,000) 84,000 (284,000) (140,000) (53,200) (333,000) 53,200 (279,800) (1,116,000) 49,000 (1,067,000) Retained Earnings 1/1/-Gibson Retained Earnings 1/1/-Keller Net Income (above) Dividends Declared Retained Earnings 12/31 (284,000) 115,000 (1,285,000) (620,000) (140,000) 60,000 (700,000) 36,000 24,000 (279,800) 115,000 (1,231,800) 90,000 410,000 320,000 267,000 726,000 748,000 Cash Accounts receivable Inventory Investment in Keller Land Buildings and equipment (net) Customer List Total Assets 177,000 356,000 440,000 726,000 180,000 496,000 40,000 12,000 762,000 40,000 36,000 390,000 300,000 95,000 5,000 530,000 796,000 90,000 3,157,000 2,375,000 1,510,000

(480,000) (610,000) 40,000 320,000 90,000 (840,000) (610,000) Liabilities Common stock Additional Paid in capital Retained Earnings 12/31 NCI in Keller, 1/1 NCI in Keller, 12/31 Total Liabilites and equity (400,000) (320,000) (90,000) (700,000) (1,285,000) (1,231,800) 446,000 (446,000) (475,200) (475,200) (3,157,000) (2,375,000) (1,510,000) 1,551,000 1,551,000 Working for Combining Multiple Entries Adjustment Total Debit Credit 12,000 Entries Cost of goods sold Entry (G1) Entry (G) Entry (Sales) Total Adjustment 10,000 200,000 210,000 12,000 Retained Earnings 1/1/18 - Gibbson Credit Entry (TL) Entry (C.) Total Adjustment 40,000 9,000 49,000 Retained Earnings 1/1/ -Keller Debit Credit Entry (G) Entry (5) Total Adjustment 10,000 610,000 620,000

Investment in Keller Debit Credit 36,000 Entry [D] Entry [C] Entry [S] Entry [0] Entry [A] Total Adjustment 9,000 612,000 84,000 57,000 762,000 36,000 NCI in Keller, 1/1 Debit Entry [S] Entry [A] Total Adjustment Credit 408,000 38,000 446,000 Amount 140,000 10,000 Calculation of Non Controlling Interest share in Keller's Income Net Income of Keller Add: Deferred unrealized gain on Intra company inventory profit on 2017 Less: Deferred unrealized gain on intra company inventory profit on 2018 Less: Amortization expenses in 2018 Adjusted Net Income of Keller in 2018 NCI share in Keller Income (133,000 x 40%) (12,000) (5,000) 133,000 53,200

Cost of Building Less: Book value of Building Accumulated Depreciation Book Value of Building Transfer Transfer price of Building Gain of Transfer (100,000 - 60,000) Life remaining Excess Depreciation per year (40,000/10) Unamortized Excess Building at the end of year 2017 (40,000 - 4,000) 140,000 (60,000) 80,000 | $ 60,000 $ 100,000 $ 40,000 10 years $ 4,000 $ 36,000 R Accounts titles and Explanation Debit Credit Transactions Entry *TA $ 36,000 40,000 $ Retained Earnigns, 1/1/2018 (Gibson) Building (140,000 - 100,000) Accumulated Depreciation (80,000 - 4,000) (to eliminate the unrealized gain) $ 76,000 4,000 Accumulated Depreciation Operating Expense (to remove the excess depreciation charged during the year) $ 4,000