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 $420,000. At the acquisition date, the fair value of the noncontrolling interest was $280,000 and Keller’s book value was $550,000. Keller had developed internally a customer list that was not recorded on its books but had an acquisition-date fair value of $150,000. This intangible asset is being amortized over 20 years.

Gibson sold Keller land with a book value of $70,000 on January 2, 2017, for $140,000. Keller still holds this land at the end of the current year.

Keller regularly transfers inventory to Gibson. In 2017, it shipped inventory costing $130,000 to Gibson at a price of $200,000. During 2018, intra-entity shipments totaled $250,000, although the original cost to Keller was only $150,000. 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 $70,000 at the end of 2018.

	Gibson Company				Keller Company
Sales	$	(850,000	)		$	(550,000	)
Cost of goods sold		550,000				350,000
Operating expenses		150,000				50,000
Equity in earnings of Keller		(90,000	)			0
Net income	$	(240,000	)		$	(150,000	)
Retained earnings, 1/1/18	$	(1,166,000	)		$	(645,000	)
Net income (above)		(240,000	)			(150,000	)
Dividends declared		140,000				50,000
Retained earnings, 12/31/18	$	(1,266,000	)		$	(745,000	)
Cash	$	174,000			$	60,000
Accounts receivable		366,000				460,000
Inventory		440,000				370,000
Investment in Keller		813,000				0
Land		160,000				440,000
Buildings and equipment (net)		501,000				350,000
Total assets	$	2,454,000			$	1,680,000
Liabilities	$	(548,000	)		$	(475,000	)
Common stock		(640,000	)			(370,000	)
Additional paid-in capital		0				(90,000	)
Retained earnings, 12/31/18		(1,266,000	)			(745,000	)
Total liabilities and equities	$	(2,454,000	)		$	(1,680,000	)

(Note: Parentheses indicate a credit balance.)

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 $85,000 book value (cost of $190,000) to Keller for $150,000 instead of land, as the problem reports? Assume that the building had a 10-year remaining life at the date of transfer.

Answer 1

GIBSON AND KELLER

Consolidation Worksheet

Year Ending December 31, 2018

Accounts	Gibson	Keller	debit	credit	Noncontrolling Interest	Consolidated Totals
Sales	(850000)	(550000)	250000			(1150000)
Cost of goods sold	550,000	350,000	20000	264000		656000
Operating expenses	150,000	50,000	7500			207500
Equity in earnings of Keller	(90,000)	0	90000			0
Separate company net income	(240000)	(150000)
Consolidated net income						(286500)
To noncontrolling interest					(54600)	54600
To Gibson Company						(231900)
RE, 1/1—Gibson	(1166000)		82900			(1083100)
RE, 1/1—Keller		(645000)	645000
Net income	(240000)	(150000)				(231900)
Dividends declared	140000	50000		30000	20000	140000
Retained earnings, 12/31	(1266000)	(745000)				(1175000)
Cash	174000	60000				234000
Accounts receivable	366000	460000		70000		756000
Inventory	440000	370000		20000		790000
Investment in Keller	813000		30000	843000		0
Land	160000	440000		70000		530000
Buildings and equipment (net)	501000	350000				851000
Customer list			142500	7500		135000
Total assets	2454000	1680000				3296000
Liabilities	(548,000)	(475,000)	70000			(953000)
Common stock	(640,000)	(370,000)				(1010000)
Additional paid-in capital	0	(90,000)				(90000)
Retained earnings, 12/31	(1,266,000)	(745,000)				(1175000)
NCI in Keller, 1/1				33400	(33400)
NCI in Keller, 12/31					(68000)	(68000)
Total liabilities and equity	(2,454,000)	(1,680,000)	1337900	1337900		(3296000)

(250000*20%)*((250000-150000)/250000) = 20000

250000+((200000*20%)*((200000-130000)/200000)) = 264000

150,000/20 = 7500

Net income attributable to noncontrolling interest

Keller reported net income	150000
Excess fair value amortization	(7500)
2017 Intra-entity gross profit realized in 2018 (inventory) ((200000*20%)*((200000-130000)/200000))	14000
2018 Intra-entity gross profit deferred (inventory)	(20000)
Keller realized net income 2018	136500
Outside ownership percentage	40%
Net income attributable to noncontrolling interest	54600

140000-70000 = 70000

(7500*60%)+(14000*60%) = 12900

70000+12900 = 82900

Change in entry *TA and ED

Entry	Account titles and explanation	Debit	Credit
Entry *TA	Retained earnings, 1/1/18 (Gibson) (70000-7000)	63000
	Buildings (net)		63000
Entry ED	Accumulated depreciation	7000
	Operating (or depreciation) expense		7000