Question

Following are financial statements for Moore Company and Kirby Company for 2018:

	Moore				Kirby
Sales	$	(800,000	)		$	(600,000	)
Cost of goods sold		500,000				400,000
Operating and interest expenses		100,000				160,000
Net income	$	(200,000	)		$	(40,000	)
Retained earnings, 1/1/18	$	(990,000	)		$	(550,000	)
Net income		(200,000	)			(40,000	)
Dividends declared		130,000				0
Retained earnings, 12/31/18	$	(1,060,000	)		$	(590,000	)
Cash and receivables	$	217,000			$	180,000
Inventory		224,000				160,000
Investment in Kirby		657,000				0
Equipment (net)		600,000				420,000
Buildings		1,000,000				650,000
Accumulated depreciation—buildings		(100,000	)			(200,000	)
Other assets		200,000				100,000
Total assets	$	2,798,000			$	1,310,000
Liabilities	$	(1,138,000	)		$	(570,000	)
Common stock		(600,000	)			(150,000	)
Retained earnings, 12/31/18		(1,060,000	)			(590,000	)
Total liabilities and equity	$	(2,798,000	)		$	(1,310,000	)

• Moore purchased 90 percent of Kirby on January 1, 2017, for $657,000 in cash. On that date, the 10 percent noncontrolling interest was assessed to have a $73,000 fair value. Also at the acquisition date, Kirby held equipment (four-year remaining life) undervalued in its financial records by $20,000 and interest-bearing liabilities (five-year remaining life) overvalued by $40,000. The rest of the excess fair over book value was assigned to previously unrecognized brand names and amortized over a 10-year life.
• During 2017 Kirby reported a net income of $80,000 and declared no dividends.
• Each year Kirby sells Moore inventory at a 20 percent gross profit rate. Intra-entity sales were $145,000 in 2017 and $160,000 in 2018. On January 1, 2018, 30 percent of the 2017 transfers were still on hand, and on December 31, 2018, 40 percent of the 2018 transfers remained.
• Moore sold Kirby a building on January 2, 2017. It had cost Moore $100,000 but had $90,000 in accumulated depreciation at the time of this transfer. The price was $25,000 in cash. At that time, the building had a five-year remaining life.

Determine all consolidated balances computationally.

Answer 1

ANSWER

Sr. No.		Consolidated balance	Explanation
1.	Sales and Other Income	$1,240,000	add the two book values and eliminate the inter company transfers
2.	Cost of Goods Sold:
	Moore's book value	$500,000
	Kirby's book value	400,000
	Eliminate inter company transfers	(160,000)
	Realized gross profit deferred in 2017	(8,700)
	Deferral of 2018 unrealized gross profit	12,800
	Cost of goods sold	$744,100
3.	Operating and Interest Expense	$275,000	add the two book values and include $18,000 amortization for current year but eliminate $3,000 excess depreciation from asset transfer
4.	Noncontrolling Interest in Subsidiary’s Income	$1,790	impact of inventory transfers is included because they were upstream but building transfer is omitted because it was downstream
	Reported income for 2018	$40,000
	Realized gross profit deferred in 2017	8,700
	Deferral of 2018 unrealized gross profit	(12,800)
	Realized income of subsidiary	$35,900
	Excess fair value amortization	(18,000)
	Adjusted subsidiary net income	17,900
	Outside Ownership	10%
	Noncontrolling Interest	$1,790
5.	Consolidated Net Income	$220,900	consolidated sales less consolidated cost of goods sold, expenses, and noncontrolling interest
	To noncontrolling interest	$1,790	(above)
	To controlling interest	$219,110
6.	Retained Earnings, 1/1/18	$1,025,970	because the parent uses the initial value method, its retained earnings must be adjusted for changes in subsidiary's book value, excess amortizations, and the impact of unrealized gross profits in previous years
	Moore's Reported Balance, 1/1/18	$990,000
	Impact of Building Transfer (parent's income was over- stated by the $15,000 gain but has been reduced by one prior year of excess depreciation)	(12,000)
	Adjustments to Convert Initial Value to Equity Method: Increase in subsidiary's book value during prior years   $80,000 Excess fair value amortization   (18,000) Deferral of 12/31/17 unrealized gross profit (subsidiary's prior income was overstated) (8,700) Realized increase in book value   53,300 Ownership 90% Equity Accrual	47,970
	Retained Earnings, 1/1/18	$1,025,970
7.	Dividends Paid	$130,000	parent balance only
8.	Retained Earnings, 12/31/18	$1,115,080	the beginning balance plus controlling interest share of consolidated net income less dividends paid
9.	Cash and Receivables	$397,000	add the two book values
10.	Inventory	$371,200	add the two book values and defer the $12,800 ending unrealized gross profit
11.	Investment in Kirby	0	eliminated for consolidation purposes
12.	Equipment (Net)	$1,030,000	add the two book values adjusted for excess allocation and amortization
13	Buildings	$1,725,000	add the two book values and add the $75,000 impact to return to historical cost as computed above for transfer
14.	Accumulated Depreciation	$384,000	add the two book values plus adjustment to historical cost ($87,000 at beginning of year less $3,000 excess depreciation for current year
15.	Other Assets	$300,000	add the two book values
16.	Brand Names	$40,000	the original $50,000 allocation less two years of amortization at $5,000 per year
17.	Total Assets	$3,479,200	summation of the consolidated totals
18.	Liabilities	$1,684,000	add the two book values and subtract the original allocation [$40,000] after two years of amortization [$8,000 per year]
19.	NCI	$80,120	10 percent of $691,300 adjusted beginning book value [$700,000 less $8,700 deferral of unrealized gross profit] plus $9,200 share of beginning unamortized excess fair value allocations plus $1,790 income share
20.	Common Stock	$600,000	parent balance only
21.	Retained Earnings, 12/31/18	$1,115,080	computed above
22.	Total Liabilities and Equities	$3,479,200	summation of consolidated balances

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