Pringle Corporation acquired an 80% interest in Chip Corporation for $300,000 on January 1, 2012 when...
Pringle Corporation acquired an 80% interest in Chip Corporation for $300,000 on January 1, 2012 when Chip's stockholders' equity consisted of $200,000 capital stock and $25,000 retained earnings. The excess cost over book value acquired was allocated to equipment that was undervalued by $50,000, inventory that was overvalued by $25,000 and to goodwill. The inventory was sold in 2012 and the equipment had a 5-year remaining useful life.
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Chip regularly sells inventory to Pringle at 150% of cost. Intercompany sales were $120,000 in 2012 and $90,000 in 2013. Pringle's inventory included $30,000 of this merchandise at 12/31/12 and $45,000 of this merchandise at 12/31/13.
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Pringle has $10,000 in accounts payable due to Chip.
Required:
Prepare the consolidation workpapers for Pringle Corporation using the process reviewed in class:
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Calculatetheunamortizeddifference/excess
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Calculate the goodwill or bargain purchase gain
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Calculate the unrealized profit for ending inventory for 2012 and 2013
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PreparethePurchasePriceAllocationandAmortizationSchedule
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Record all necessary elimination and adjusting journal entries
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Post the journal entries (as written in #5 above) to the Consolidation worksheet
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Homework Answers
1. Unrealised profit for ending inventory for 2012.
Sales price = $120,000
Sales Price = 150% of cost.
Hence Cost of sales = $120,000/150% = $80,000
Therefore, Profit for Chip on Sales to Pringle = 120,000-80,000 = 40,000
Therefore profit margin = 40,000/120,000 * 100 = 33.33% of Sales
Inventory on 31.12.2012 = 30,000
Therefore Unrealized profit = 30,000 * 33.33% = 10,000
Inventory on 31.12.2013 = 45,000
Therefore unrealized profit = 45,000 * 33.33% = 15,000
2. Calculation of Goodwill or Bargain Purchase Price :
Book Value of Chip Limited:
Capital Stock = 200,000.
Add: Retained Earnings = 25,000.
Add: Undervalued Stock = 50,000.
Less: Overvalued Inventory = 25,000.
Total = 200,000 + 25,000 + 50,000 - 25,000 = 250,000.
Therefore 100% Book Value = 250,000.
Accordingly 80% Book Value = 250,000 * 80% = 200,000.
Purchase Price = 300,000.
Therefore Goodwill = 300,000 - 200,000 = $ 100,000.
3. Journal Entries for elimination :
a) Accounts payable A/c. Dr. 10,000.
Accounts Receivable A/c Cr. 10,000.
Entry Date 31/12/12
b) Stock Reserve A/c Dr. 10,000
Inventory A/c Cr. 10,000
Entry Date 01/01/13
c) Inventory A/c Dr. 10,000
Stock Reserve A/c Cr. 10,000
Entry Date - 31/12/13
d) Stock Reserve A/c Dr. 15,000
Inventory A/c Cr. 15,000
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