Question

On January 1, 2018, Sledge had common stock of $130,000 and retained earnings of $270,000. During that year, Sledge reported sales of $140,000, cost of goods sold of $75,000, and operating expenses of $41,000.     On January 1, 2016, Percy, Inc., acquired 70 percent of Sledge's outstanding voting stock. At that date, $61,000 of the acquisition-date fair value was assigned to unrecorded contracts (with a 20-year life) and $21,000 to an undervalued building (with a 10-year remaining life). In 2017, Sledge sold inventory costing $11,200 to Percy for $16,000. Of this merchandise, Percy continued to hold $6,000 at year-end. During 2018, Sledge transferred inventory costing $12,600 to Percy for $21,000. Percy still held half of these items at year-end. On January 1, 2017, Percy sold equipment to Sledge for $12,500. This asset originally cost $17,000 but had a January 1, 2017, book value of $9,200. 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 Entry *G to remove the intra-entity gross profit from the beginning account balances.

• Prepare Entry *TA to adjust the equipment balance to the original cost and to adjust the accumulated depreciation to the consolidated January 1, 2018 balance.

• Prepare Entry S to eliminate the subsidiary's stockholders' equity accounts and to recognize the noncontrolling interest balance as of January 1, 2018.

• Prepare Entry A to recognize acquisition-date fair value allocations adjusted for 2 years of amortization.

• Prepare Entry I to remove the parent's equity method income.

• Prepare Entry E to recognize 2018 excess amortization.

• Prepare Entry TI to eliminate the intra-entity inventory tranfers during 2018.

• Prepare Entry G to remove the intra-entity gross profit from the ending account balances.

• Prepare Entry ED to eliminate the excess depreciation on equipment recorded at transfer price

• 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) 61,000 21,000 82,000 Amortization per year (A/B) 3,050 2,100 5,150 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 61,000 6,100 Building 21,000 4,200 Total 82,000 Carrying Value as on 01/01/18 (A-B) 54,900 16,800 71,700 Profit % [D = (C/A)*100] Calculation of Deferred Profit on Intercompany Inventory Sold (Upstream) Transfer Price Cost Gross Profit Year [A] [B] [C=A-B] 2017 16,000 11,200 2018 21,000 12,600 *Ending inventory in 2018 (21,000/2) 10,500 Ending Inventory Deferred Profit (E) (F=ExD) 6,000 1,800 10,500 4,200 30% 4,800 8,400 40%

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 (3,300/5) Unamortized Gain (3,300 - 640) 17,000 9,200 7,800 12,500 3,300 660 2,640 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 140,000 (75,000) (41,000) 24,000 1,800 (4,200) (5,150) 16,450 Share of Percy in Net Income of Sledge (16,450 x 70%) Add: Confirmed Gain on Equipment sale Equity Income from Sledge 11,515 660 12,175

Entries S.No Debit Credit 1,800 Entries Accounts titles and Explanation 1 *G Retained Earnings, 01/01/18 (Sledge) Cost of goods sold (to remove intra-entity gross profit from beginning account balance) 1,800 *TA 4,500 2,640 Equipment (17,000 - 12,500) Investment in Seldge Accumulated Depreciation (7,800 - 660) (to adjust the equipment balance to the original cost (17,000) and accordingly adjust the accumulated Depreciation balance) 7.140 130,000 268,200 Common Stock Retained Earnings 01/01/18 (Sledge) (270.000 -1.800) Investment in Sledge (130,000 + 268,200) x 70% Noncontrolling interest in Sledge (130,000 + 268,200 ) x 30% (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.) 278,740 119,460 Contract 54,900 16,800 Buildings Investment in Sledge (71,700 x 70%) Noncontrolling interest in Sledge (71,700 x 30%) (to recognize acquisition date fair value allocations adjusted for 2 years of amortization.) 50,190 21,510 12,175 Equity Income of Sledge Investment in Sledge (to remove the parent's equity method income) 12.175

3,050 2,100 Amortization Expense Depreciation expense Contract Building (to recognize 2018 excess amortization.) 3,050 2,100 1 21.000 Sales Cost of goods sold (to eliminate the intra-entity inventory tranfers during 2018) 21,000 G 4,200 Cost of Goods sold Inventory (to remove the intra-entity gross profit from the ending account balances) 4,200 ED 660 Accumulated Depreciation Depreciation expenses (to eliminate the excess depreciation on equipment recorded at transfer price.) 660 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 (16,450 30%) 140,000 (75,000) (41,000) 24,000 1,800 (4,200) (5,150) 16,450 4,935