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 $1,050,000. At the acquisition date, the fair value of the noncontrolling interest was $700,000 and Keller's book value was $1,400,000. Keller had developed internally a customer list that was not recorded on its books but had an acquisition-date fair value of $350,000. This intangible asset is being amortized over 20 years Gibson sold Keller land with a book value of $80,000 on January 2, 2017, for $180,000. Keller still holds this land at the end of the current year. Keller regularly transfers inventory to Gibson. In 2017, it shipped inventory costing $280,000 to Gibson at a price of $400,000. During 2018, intra-entity shipments totaled $450,000, although the original cost to Keller was only $292,500. 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

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 120,000 Equity in earnings of Keller (120,000 x 60% ) 72,000 Consideration transferred 1,050,000 Fair Value of Non Controlling Interest 700,000 Total Fair value of Keller's 1,750,000 (1,400,000) Book Value of Keller's Fair Value in Excess of Book Value 350,000 Excess Fair Value Assigned to: Customer list 350,000 Life 20 year Amortization per year (350,000/20) Parent Share's in amortization (17,500 x 60 %) 17,500 10,500 NCI in amortization (17,500 x 40%) 7,000 Unamortized Value of Customer list as on 1/1/2018 Customer list as on 1/1/2017 350,000 Less: Amortization during the year 2017 (17,500) Unamortized Value of Customer list as on 1/1/2018 332,500 Profit on Inter Company sale of Land (downstream) Year 2017 Book Value of Land Sold (a) 80,000 Sold price to Keller (b) 180,000 Gain to Gibson( b-a) 100,000

Profit on Inter Company sale of Inventory (Upstream) Non Controlling Interest 60% on Deferred Share 40% on Deferred Profit C=(b-a) year end d- (cx 20%) Profit (dx 60%) Profit (dx 40%) Gibson Share Deferred Profit at Transfer Price (a) Cost (b) Year 2017 9,600 400,000 280,000 120,000 24,000 14,400 Year 2018 450,000 157,500 292,500 31,500 18,900 12,600 55,500 850,000 277,500 572,500 33,300 22,200

Consolidation Entries Account titles and explanation Retained Earnings, 1/1/18 (Gibson) Credit Debit Event [TL] 100,000 Landi 100,000 (to remove unrealized gain on intra-entity downstream transfer of land on 2017) Retained Earnings, 1/1/18 (Keller) Cost of goods sold (to remove unrealized gain on intra-entity upstream transfer of inventory on 2017) *G] 24,000 24,000 [c] Retained Earnings, 1/1/18 (Gibson) 24,900 Investment in Keller 24,900 /to recognized the share in amortization expenses in 2017 i.e 10,500 and Share in unrealized gain on intra-entity transfer of inventory on 2017 i.e. 14,400) Common stock (Keller) Additional Paid in Capital (Keller) Retained Earnings, 1/1/18 (Keller) (745,000-24,000) Investment in Keller (610,000+90,000 +721,000) x 609% Non Controlling in Keller, 1/1/18 (610,000+90,000+721,000) x 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) 610,000 90,000 721,000 852,600 568,400 Equity in earnings in Keller Investment in Keller 72,000 72,000 [to eliminate intra -entity income accrual] [A] Customer List 332,500 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) 199,500 133,000

Investment in Kellar (50,000 x 60%) [D] 30,000 Dividend Declared 30,000 to eliminate intra-entity 60 % dividend transfer) E] Amortization expense 17,500 Customer list 17,500 (to record amortization expense during the year) Liabilities P] 40,000 Accounts receivable 40,000 [to remove the intra entity debt] Sales [TI) 450,000 Cost of goods sold /to eliminate the current year intra entity inventory transfer] 450,000 Cost of goods sold Inventory to eliminate the defer 2018 unrealized inventory gross profit] G] 31,500 31,500 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 120,000 24,000 (31,500) (17,500) Adjusted Net Income of Keller in 2018 95,000 NCI share in Keller Income (95,000 x 40 % ) 38,000

GIBSON AND KELLER Consolidated Worksheet For Year Ending December 31, 2018 Consolidated Non Gibson Keller (750,000) Debit Credit Controlling Totals Accounts (1,350,000) (1,050,000) Sales 450,000 31,500 17,500 Cost of goods sold 474,000 857,500 750,000 550,000 Operating Expense 130,000 80,000 227,500 (72,000) (242,000) Equity in earnings of Kellar 72,000 (120,000) Separate Net Income (265,000) Consolidated Net Income Net Income attributable to NCI (38,000) 38,000 (227,000) To Gibson Company Retained Earnings 1/1/-Gibson Retained Earnings 1/1/-Keller Net Income (above) (1,366,000) (1,241,100) 124,900 (745,000) (120,000) 745,000 (242,000) (227,000) Dividends Declared 150,000 50,000 30,000 20,000 150,000 (1,458,000) Retained Earnings 12/31 (1,318,100) (815,000) Cash 80,000 194,000 274,000 Accounts receivable 406,000 1,026,000 660,000 40,000 31,500 Inventory 640,000 570,000 1,178,500 Investment in Keller 1,119,000 1,149,000 30,000 Land 220,000 640,000 760,000 100,000 Buildings and equipment (net) 521,000 550,000 1,071,000 332,500 17,500 Customer List 315,000 Total Assets 3,100,000 2,500,000 4,624,500

Liabilities (802,000) (840,000) (985,000) (1,747,000) 40,000 Common stock (610,000) 610,000 (840,000) Additional Paid in capital Retained Earnings 12/31 NCI in Keller, 1/1 (90,000) 90,000 (1,318,100) (1,458,000) (815,000) (701,400) 701,400 NCI in Keller, 12/31 (719,400) (719,400) (3,100,000) Total Liabilites and equity (4,624,500) (2,500,000) 2,543,400 2,543,400 Working Adjustment Total Entries Debit Credit Cost of goods sold Entry (G) Entry (G) Entry (TI) 31,500 24,000 450,000 Total Adjustment 31,500 474,000 Retained Earnings 1/1/18- Gibbson Debit Credit Entry (TL) Entry (C) Total Adjustment 100,000 24,900 124,900

Retained Earnings 1/1/-Keller Debit Credit Entry (*G) Entry (S) 24,000 721,000 Total Adjustment 745,000 Investment in Keller Debit Credit Entry [D] Entry [C] Entry [S] Entry [I 30,000 24,900 852,600 72,000 Entry [A] 199,500 Total Adjustment 30,000 1,149,000 NCI in Keller, 1/1 Debit Credit Entry [S] 568,400 133,000 Entry [A] Total Adjustment 701,400

Cost of Building $ 390,000 (185,000) Less: Book value of Depreciation Accumulated Depreciation $ 205,000 Book Value of Building Transfer Transfer price of Building Gain of Transfer (350,000- 185,000) 185,000 $ 350,000 165,000 10 years Life remaining Excess Depreciation per year (165,000/10) $ 16,500 $ Unamortized Excess Building at the end of year 2017 (165,000 16,500) 148,500 Accounts titles and Explanation Debit Credit Transactions Entry TA 1) Retained Earnigns, 1/1/2018 (Gibson) Building (390,000- 350,000) Accumulated Depreciation (205,000- 16,500) (to eliminate the unrealized gain) 148,500 40,000 $ 188,500 ED Accumulated Depreciation Operating Expense (to remove the excess depreciation charged during the year) 2) 16,500 16,500