Question

Pisa Company acquired 75 percent of Siena Company on January 1, 20X3 for $712,500. The fair value of the noncontrolling interest was equal to 25 percent of book value. On the date of acquisition, Siena had common stock outstanding of $300,000 and a balance in retained earnings of $650,000. During 20X3, Siena purchased inventory for $35,000 and sold it to Pisa for $50,000. Of this amount, Pisa reported $20,000 in ending inventory in 20X3 and later sold it in 20X4. In 20X4, Pisa sold inventory it had purchased for $40,000 to Siena for $60,000. Siena sold $45,000 of this inventory in 20X4.

           

            Required:

            (a.)Give the appropriate 2003 elimination entry or entries needed in a three-part consolidation workpaper to eliminate the effects of the 2003 inventory sales from Sienna to Pisa.

            (b.) Give the appropriate 2004 elimination entry or entries needed in a three-part consolidation workpaper to eliminate the effects of the inventory sales between Sienna and Pisa.

            (c.) If the 2004 net income of Sienna was $200,000, compute the income to the non-controlling interest.

Answer 1

a Calculation of Deferred profit in 2003 (Upstream) i.e. sold by subsidiary to parent Sale price of Inventory Less: Cost Profit on Sale Ending Inventory Deferred Profit (20,000 x 15,000/50,000) 50,000 (35,000) 15,000 20,000 6,000 Entries to effect the intercompany sales of Invento No Account Titles and Explanation Debit Credit TI Sales 50,000 Cost of goods sold to eliminate the intercompany sale 50,000 Cost of goods sold 6,000 Invento 6,000 to eliminate the deferred profit

b) Calculation of Deferred profit in 2004 (downstream) i.e. sold by Parent to Subsidiary Sale price of Inventory Less: Cost of Inventory Profit on Sale of Inventory Ending Inventory hold by Siena (60,000 - 45,000) Deferred Profit (15,000 x 20,000/60,000) 60,000 40,000) 20,000 15,000 5,000 No Account Titles and Explanation Debit Credit G Retained Earning 01/01/14 (Siena 6,000 Cost of goods sold to eliminate the deferred profit at the beginnin 6,000 TI Sales 60,000 Cost of goods sold to eliminate the intercompany sale 60,000 Cost of goods sold 5,000 Invento 5,000 to eliminate the deferred profit Note: the Deferred Profit at the beginning of year entry can be made as per below as well No Account Titles and Explanation Debit Credit Investment in Siena (6,000 x 75% Noncontrolling interest (6,000 x 25% Cost of goods sold (to eliminate the deferred profit at the beginning) 4,500 1,500 6,000

c) Calculation of Net Income to the controlling Interest Net Income of Siena Add: Deferred profit at the beginning of year Adjusted Net Income of Siena 200,000 6,000 206,000 Income attributable to Noncontrolling interest (206,000 x 25%) Income to the non-controlling Interest Note: In Dowam sale noncontrolling interest doesn't have any share. 51,500 51,500