Question

On January 1, 2016, Monica Company acquired 80 percent of Young Company’s outstanding common stock for $760,000. The fair value of the noncontrolling interest at the acquisition date was $190,000. Young reported stockholders’ equity accounts on that date as follows: Common stock—$10 par value $ 200,000 Additional paid-in capital 50,000 Retained earnings 470,000 In establishing the acquisition value, Monica appraised Young's assets and ascertained that the accounting records undervalued a building (with a five-year remaining life) by $50,000. Any remaining excess acquisition-date fair value was allocated to a franchise agreement to be amortized over 10 years. During the subsequent years, Young sold Monica inventory at a 40 percent gross profit rate. Monica consistently resold this merchandise in the year of acquisition or in the period immediately following. Transfers for the three years after this business combination was created amounted to the following: Year Transfer Price Inventory Remaining at Year-End (at transfer price) 2016 $ 80,000 $ 16,000 2017 100,000 18,000 2018 110,000 24,000 In addition, Monica sold Young several pieces of fully depreciated equipment on January 1, 2017, for $42,000. The equipment had originally cost Monica $62,000. Young plans to depreciate these assets over a 6-year period. In 2018, Young earns a net income of $200,000 and declares and pays $55,000 in cash dividends. These figures increase the subsidiary's Retained Earnings to a $800,000 balance at the end of 2018. Monica employs the equity method of accounting. Hence, it reports $142,680 investment income for 2018 with an Investment account balance of $921,120. Under these circumstances, prepare the worksheet entries required for the consolidation of Monica Company and Young Company. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

Answer 1

760,000 190,000 950,000 Consideration transferred by Monica to young for 80% of share Fair value of Non controlling interest Total fair value of Young Company as on 01/01/16 Less: Book Value as on 01/01/16 Common stock Additional paid in capital Retained earnings Excess of fair value over book value Excess fair value assign to: Building Franchise agreement (Balance) (230,000 - 50,000) -200,000 -50,000 -470,000 230,000 50,000 180,000 Depreciation/Amoritzation of Excess value of assets acquire Life (in years) Assets Value as on 1/1/16 (A) (B) Building Franchise agreement Total Amoritzation per year C= (A/B) 10,000 18,000 28,000 Value as on 12/31/2017 E= (D-C) 30,000 144,000 174,000 50,000 180,000 230,000 Value as on 12/31/2016 D= (A-C) 40,000 162,000 202,000

Calculation of Deferred profit on intra company sale Inventory Transfer (Upstream) Inventory remaining at Profit % Deferred Profit Year Iyear end (A) (B) C= (AⓇB) 2017 18,000 40% 7,200 2018 24,000 40% 9,600 Equipment transfer (Downstream) As Equipment is fully depreciated hence sale price of equipment would be the gain on sale Original Cost and Accumulated Depreciation 62,000 Gain on sale of equipment 1/1/2017 42,000 Life Excess Depreciation per year (42,000/6) 7,000 Deferred Gain on equipment 1/1/2018 Gain on sale of equipment 1/1/2017 Less: Depreciation on equipment per year Deferred Gain on equipment 1/1/2018 42,000 -7,000 35,000 Calculation of Retained Earning of Young as on 1/1/2018 Retained Earnings as on 12/31/2018 Less: Net Income during the year 2018 Add: Dividend of 2018 Unadjusted Retianed Earnings 1/1/2018 Less: Removal of deferred profit 1/1/2018 Adjusted Retained Earnings 1/1/2018 800,000 200,000 55,000 655,000 7,200 647,800

Consolidation Entries Worksheet No Debit Credit Entry 1 *G 7,200 Account Titles and Explanation Retained Earnings - Young (1/1/2018) Cost of goods sold (to recoginze the deferred profit on inventory as on 1/1/18) 7,200 2 *TA 35,000 20,000 Investment in young Equipment (54,000-18,000) Accumulated Depreciation - Equipment (62,000 - 42,000) (to eliminate the gain on equipment sold as on 1/1/18 and bring back the beginning book value based on historical cost) 55,000 3*C No Entry Required 200,000 50,000 647,800 Common Shares - Young Additional Paid In capital - Young Retained Earnings - Young (1/1/2018) Investment in young (80%) Non Controlling Interest (20%) (to eliminate the equity accounts of subsidiary and recognize non controlling interest) 718,240 179,560 30,000 144,000 Building Franchise agreement Investment in young (80%) Non Controlling Interest (20%) (to record the unamortized value of excess assets as on 1/1/2017) 139,200 34,800

142,680 Investment Income Investment in young (to eliminate the intra-entity income accrual) 142,680 44,000 Investment in young Dividend declared (55,000 x 80%) (to eliminate the intra - entity dividend transfers) 44,000 18,000 10,000 Amortization Expense Depreciation expense Building Franchise Agreement (to record the amortization and depreciation expense during the year 2018) 10,000 18,000 110,000 Sales Cost of goods sold (to eliminate the intra company inventory transfer during the year 2018) 110,000 9,600 Cost of goods sold Inventory (to eliminate the deferred profit on intra company inventory sold as on 12/31/2018) 9,600 7,000 Accumulated Depreciation Depreciation expense (to remove excess depreciation charged on intracompany assets) 7,000