Question

On January 1, 2018, Sledge had common stock of $320,000 and retained earnings of $460,000. During that year, Sledge reported sales of $330,000, cost of goods sold of $170,000, and operating expenses of $60,000. On January 1, 2016, Percy, Inc., acquired 80 percent of Sledge's outstanding voting stock. At that date, $80,000 of the acquisition-date fair value was assigned to unrecorded contracts (with a 20-year life) and $40,000 to an undervalued building (with a 10-year remaining life). In 2017, Sledge sold inventory costing $17,500 to Percy for $35,000. Of this merchandise, Percy continued to hold $9,000 at year-end. During 2018, Sledge transferred inventory costing $20,000 to Percy for $40,000. Percy still held half of these items at year-end. On January 1, 2017, Percy sold equipment to Sledge for $22,000. This asset originally cost $36,000 but had a January 1, 2017, book value of $13,000. At the time of transfer, the equipment's remaining life was estimated to be five years. Percy has properly applied the equity method to the investment in Sledge. a. Prepare worksheet entries to consolidate these two companies as of December 31, 2018. b. Compute the net income attributable to the noncontrolling interest for 2018.

Answer 1

Amortization of Excess Fair Value allocated to specified Assets Remaining Useful life in years (B) Assets Contract Building Total Value As on 01/01/2016 (A) 80,000 40,000 120,000 Amortization per year (A/B) 4,000 4,000 8,000 10 Carrying Value of the specified assets as on 01/01/18 Accumulated Amortization for 2 years i.e. 2016-17 Value As on |(Amortization x 2 years) Assets 01/01/2016 (A) (B) Contract 80,000 8,000 Building 40,000 8,000 Total 120,000 Carrying Value as on 01/01/18 (A-B) 72,000 32,000 104,000 Profit % D = (C/A)x100] [B] Calculation of Deferred Profit on Intercompany Inventory Sold (Upstream) Transfer Price Cost Gross Profit Year [A] [C=A-B] 2017 35,000 17,500 17,500 2018 40,000 20,000 20,000 * Ending inventory in 2018 (40,000/2) 20,000 Ending Inventory Deferred Profit (E) (F= ExD) 9,000 4,500 20,000 10,000 50% 50%

Calculation of Gain on Intercompany Sale of Equipment (Downstream) Original Cost (a) Book Value of Equipment Sold (b) Accumulated Depreciation (a-b) Sale price of Equipment (c) Gain on Sale of Equipment (c-b) Remaining Life in years Excess Amortization per year (9,000/5) Unamortized Gain (9,000 - 1,800) 36,000 13,000 23,000 22,000 9,000 5 1,800 7,200 Calculation of Equity Income from Subsidiary Net Income of Sledge in 2018 Sales Cost of goods sold Operating expenses Net Income of Sledge in 2018 Add: Deferred Intercompany Inventory Profit beginning balance Less: Deferred Intercompany Inventory Profit Ending Balance Less: Excess Amortization Adjusted Net Income of Sledge 330,000 (170,000) (60,000) 100,000 4,500 (10,000) (8,000) 86,500 Share of Percy in Net Income of Sledge (86,500 x 80%) Add: Confirmed Gain on Equipment sale Equity Income from Sledge 69,200 1,800 71,000

Entries S.No Debit Credit 4,500 Entries Accounts titles and Explanation Retained Earnings, 01/01/18 (Sledge) Cost of goods sold (to remove intra-entity gross profit from beginning account balance) 4,500 IA 14,000 7,200 Equipment (36,000 - 22,000) Investment in Seldge Accumulated Depreciation (23,000 - 1,800) (to adjust the equipment balance to the original cost (22,000) and accordingly adjust the accumulated Depreciation balance) 21,200 320,000 455,500 Common Stock Retained Earnings 01/01/18 (Sledge) (460,000 -4,500) Investment in Sledge (320,000 + 455,500) X 80% Noncontrolling interest in Sledge (320,000 +455,500 ) 20% (to eliminate the subsidiary's stockholders' equity accounts after adjusting Retained Earnings from Entry "G and to recognize the noncontrolling interest balance as of January 1, 2018.) 620,400 155,100 72,000 32,000 Contract Buildings Investment in Sledge (104,000 x 80%) Noncontrolling interest in Sledge (104,000 x 20%) (to recognize acquisition-date fair value allocations adjusted for 2 years of amortization.) 83,200 20,800 71,000 Equity Income of Sledge Investment in Sledge (to remove the parent's equity method income) 71,000

4,000 4,000 Amortization Expense Depreciation expense Contract Building (to recognize 2018 excess amortization.) 4,000 4,000 40,000 Sales Cost of goods sold (to eliminate the intra-entity inventory tranfers during 2018) 40,000 86 10,000 Cost of Goods sold Inventory (to remove the intra-entity gross profit from the ending account balances) 10,000 9 ED 1,800 Accumulated Depreciation Depreciation expenses (to eliminate the excess depreciation on equipment recorded at transfer price.) 1,800 b. Net Income Attributable to Non Controlling Interest Net Income of Sledge in 2018 Sales Cost of goods sold Operating expenses Net Income of Sledge in 2018 Add: Deferred Intercompany Inventory Profit beginning balance Less: Deferred Intercompany Inventory Profit Ending Balance Less: Excess Amortization Adjusted Net Income of Sledge Share of Non Controlling Interest in Income of Sledge (86,500 20%) 330,000 (170,000) (60,000) 100,000 4,500 (10,000) (8,000) 86,500 17,300