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 $420,000. At the acquisition date, the fair value of the noncontrolling interest was $280,000 and Keller’s book value was $550,000. Keller had developed internally a customer list that was not recorded on its books but had an acquisition-date fair value of $150,000. This intangible asset is being amortized over 20 years.

Gibson sold Keller land with a book value of $70,000 on January 2, 2017, for $140,000. Keller still holds this land at the end of the current year.

Keller regularly transfers inventory to Gibson. In 2017, it shipped inventory costing $130,000 to Gibson at a price of $200,000. During 2018, intra-entity shipments totaled $250,000, although the original cost to Keller was only $150,000. 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 $70,000 at the end of 2018.

	Gibson Company				Keller Company
Sales	$	(850,000	)		$	(550,000	)
Cost of goods sold		550,000				350,000
Operating expenses		150,000				50,000
Equity in earnings of Keller		(90,000	)			0
Net income	$	(240,000	)		$	(150,000	)
Retained earnings, 1/1/18	$	(1,166,000	)		$	(645,000	)
Net income (above)		(240,000	)			(150,000	)
Dividends declared		140,000				50,000
Retained earnings, 12/31/18	$	(1,266,000	)		$	(745,000	)
Cash	$	174,000			$	60,000
Accounts receivable		366,000				460,000
Inventory		440,000				370,000
Investment in Keller		813,000				0
Land		160,000				440,000
Buildings and equipment (net)		501,000				350,000
Total assets	$	2,454,000			$	1,680,000
Liabilities	$	(548,000	)		$	(475,000	)
Common stock		(640,000	)			(370,000	)
Additional paid-in capital		0				(90,000	)
Retained earnings, 12/31/18		(1,266,000	)			(745,000	)
Total liabilities and equities	$	(2,454,000	)		$	(1,680,000	)

(Note: Parentheses indicate a credit balance.)

Prepare a worksheet to consolidate the separate 2018 financial statements for Gibson and Keller.

How would the consolidation entries in requirement (a) have differed if Gibson had sold a building with a $85,000 book value (cost of $190,000) to Keller for $150,000 instead of land, as the problem reports? Assume that the building had a 10-year remaining life at the date of transfer.

Answer 1

Consolidation Worksheet
			Consiolidation entries
Accounts	Gibson	Keller	Debit	Credit	NCI	Consolidated Totals
Sales	($850,000)	($550,000)				($1,400,000)
Cost of goods sold	$550,000	$350,000	$20,000	$14,000		$906,000
Operating expense	$150,000	$50,000	$7,500			$207,500
Equity in earnings of Keller	($90,000)		$90,000			$0
Separate company net income	($240,000)	($150,000)
Consolidated net income						($286,500)
To noncontrolling interest					($54,600)	($54,600)
To Gibson Company						($231,900)
Retained Earnings, 1/1	($1,166,000)	($645,000)	$729,000			($1,082,000)
Net income	($240,000)	($150,000)				($231,900)
Dividends declared	$140,000	$50,000		$30,000	$20,000	$140,000
Retained Earnings, 12/31	($1,266,000)	($745,000)				($1,173,900)
Cash	$174,000	$60,000				$234,000
Accounts receivable	$366,000	$460,000		$70,000		$756,000
Inventory	$440,000	$370,000		$20,000		$790,000
Investment in Keller	$813,000	$0		$813,000		$0
Land	$160,000	$440,000		$70,000		$530,000
Building and Equipment	$501,000	$350,000				$851,000
Customer list			$150,000	$7,500		$142,500
Total assets	$2,454,000	$1,680,000				$3,303,500
Liabilities	($548,000)	($475,000)	$70,000			($953,000)
Common Stock	($640,000)	($370,000)	$370,000			($640,000)
APIC		($90,000)	$90,000			$0
Retained Earnings, 12/31	($1,266,000)	($745,000)				($1,173,900)
Non-controlling interest, 1/1				$502,000		$0
Non-controlling interest, 12/31					$536,600	($536,600)
Total liabilities and SE	($2,454,000)	($1,680,000)	$1,526,500	$1,526,500		($3,303,500)
Unrealized gain in unsold inventory in 2017
Selling price	$200,000
Cost	$130,000
Profit	$70,000
Gross margin	35%
Unsold Inventory	$40,000
Unrealized gain in unsold inventory in 2017	$14,000
Unrealized gain in unsold inventory in 2018
Selling price	$250,000
Cost	$150,000
Profit	$100,000
Gross margin	40%
Unsold Inventory	$50,000
Unrealized gain in unsold inventory in 2018	$20,000
Profit on land
Selling price	$140,000
Book Value	$70,000
Profit on land	$70,000
Profit on land is debited to retained earnings
NCI, 1/1/2018
Common Stock	$370,000
APIC	$90,000
Retained earnings, 1/1/2018	$645,000
Excess of fair value over book value	$150,000
Total	$1,255,000
NCI, 40%	$502,000
NCI, 31/12/2018
NCI,1/1/2018	$502,000
Add: Profit for 2018 (136500 x 40%)	$54,600
Less: Dividend	($20,000)
NCI, 31/12/2018	$536,600
Amortization of customer list = 150000/20 = $7500 per year
Retained earnings adjusted for unrealized profit on land and realized
profit on inventory sold in 2018
If building had sold instead of land
Cost of building	$190,000
Book value	$85,000
Accumulated depreciation	$105,000
Selling price	$150,000
Less: Book value	$85,000
Gain on sale of land	$65,000
Consolidation entry in the year of sale
Gain on sale of land	$65,000
Building	$40,000
Accumulated depreciation		$105,000
Consolidation entry in 2018
Gain on sale of land	$65,000
Building	$40,000
Depreciation expense	$4,000
Accumulated depreciation		$109,000
Difference in depreciation
Depreciation at original cost	$19,000
Depreciation at selling cost	$15,000
Depreciation charged less by	$4,000