Question

On January 1, 2016, Monica Company acquired 80 percent of Young Company’s outstanding common stock for $728,000. The fair value of the noncontrolling interest at the acquisition date was $182,000. Young reported stockholders’ equity accounts on that date as follows:

Common stock—$10 par value	$	300,000
Additional paid-in capital		70,000
Retained earnings		430,000

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 $70,000. 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 30 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	$	40,000			$	12,000
2017		60,000				14,000
2018		70,000				20,000

In addition, Monica sold Young several pieces of fully depreciated equipment on January 1, 2017, for $38,000. The equipment had originally cost Monica $54,000. Young plans to depreciate these assets over a 5-year period.

In 2018, Young earns a net income of $160,000 and declares and pays $35,000 in cash dividends. These figures increase the subsidiary's Retained Earnings to a $760,000 balance at the end of 2018.

Monica employs the equity method of accounting. Hence, it reports $119,760 investment income for 2018 with an Investment account balance of $921,200. 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

SOLUTION:-

  Given the data worksheets entries required for the consolidation

if MONICA company and young company:

728,000 182,000 910,000 Consideration transferred by Monica to young for 80% of share Fair value of Non controlling interest Total fair value of Young Company Less: Book Value Common stock Additional paid in capital Retained earnings Excess of fair value over book value Excess fair value assign to: Building Franchise agreement (Balance) (110,000 - 70,000) -300,000 -70,000 -430,000 110,000 70,000 40,000 Depreciation/Amoritzation of Excess value of assets acquire Assets Value as on 1/1/16 (A) Life (in years) L (B) Building Franchise agreement 70,000 40,000 110,000 Amoritzation per year C= (A/B) 14,000 4,000 18,000 Value as on 1 Value as on 12/31/2016 12/31/2017 D= (A-C) E= (D-C) 56,000 42,000 36,000 32,000 92,000 74,000 Total

Calculation of Deferred profit on intra company sale Inventory Transfer (Upstream) Inventory remaining at Year year end (A) 2017 14,000 2018 20,000 Profit % (B) 30% 30% Deferred Profit C= (AXB) 4,200 6,000 Equipment transfer (Downstream) Original Cost and Accumulated Depreciation Gain on sale of equipment 1/1/2017 Life Excess Depreciation per year (38,000/5) 54,000 38,000 7,600 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 38,000 -7,600 30,400 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 Unadjusted Retianed Earnings 1/1/2018 Less: Removal of deferred profit 1/1/2018 Adjusted Retained Earnings 1/1/2018 160,000 35,000 635,000 4,200 630,800

Consolidation Entries Worksheet No Entry Debit Credit 4,200 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) 4,200 30,400 16,000 Investment in young Equipment (54,000-18,000) Accumulated Depreciation - Equipment (54,000 - 7,600) (to eliminate the gain on equipment sold as on 1/1/18 and bring back the beginning book value based on historical cost) 46,400 No Entry Required 300,000 70,000 630,800 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) 800,640 200,160 5A 42,000 32,000 Building Franchise agreement Investment in young (80%) Non Controlling Interest (20%) (to record the unamortized value of excess assets as on 1/1/2017) 59,200 14,800

119,760 Investment Income Investment in young (to eliminate the intra-entity income accrual) 119,760 28,000 Investment in young Dividend declared (35,000 x 80%) (to eliminate the intra - entity dividend transfers) 28,000 4,000 14,000 Amortization Expense Depreciation expense Building Franchise Agreement (to record the amortization and depreciation expense during the year 2018) 14,000 4,000 70,000 Sales Cost of goods sold (to eliminate the intra company inventory transfer during the year 2018) 70,000 6,000 Cost of goods sold Inventory (to eliminate the deferred profit on intra company inventory sold as on 12/31/2018) 6,000 7,600 Accumulated Depreciation Depreciation expense (to remove excess depreciation charged on intracompany assets) 7,600

THANK YOU ,If any queries please leave your valuable comment on comment box.