Question

Please answer the Advanced Accounting questions below with explanations on how you solved for the answers. Thank you!

1. Matthew, Inc., owns 30 percent of the outstanding stock of Lindman Company and has the ability to significantly influence the investee’s operations and decision making. On January 1, 2021, the balance in the Investment in Lindman account is $347,000. Amortization associated with this acquisition is $10,400 per year. In 2021, Lindman earns an income of $219,000 and declares cash dividends of $73,000. Previously, in 2020, Lindman had sold inventory costing $26,400 to Matthew for $44,000. Matthew consumed all but 25 percent of this merchandise during 2020 and used the rest during 2021. Lindman sold additional inventory costing $33,600 to Matthew for $60,000 in 2021. Matthew did not consume 40 percent of these 2021 purchases from Lindman until 2022.

a. What amount of equity method income would Matthew recognize in 2021 from its ownership interest in Lindman?

b. What is the equity method balance in the Investment in Lindman account at the end of 2021?

2. Miller Company acquired an 80 percent interest in Taylor Company on January 1, 2019. Miller paid $800,000 in cash to the owners of Taylor to acquire these shares. In addition, the remaining 20 percent of Taylor shares continued to trade at a total value of $200,000 both before and after Miller’s acquisition.

On January 1, 2019, Taylor reported a book value of $674,000 (Common Stock = $337,000; Additional Paid-In Capital = $101,100; Retained Earnings = $235,900). Several of Taylor’s buildings that had a remaining life of 20 years were undervalued by a total of $89,800.

During the next three years, Taylor reports income and declares dividends as follows:

Year	Net Income			Dividends
2019	$	79,000		$	11,500
2020		103,500			17,400
2021		115,900			23,300

Determine the appropriate answers for each of the following questions:

a. What amount of excess depreciation expense should be recognized in the consolidated financial statements for the initial years following this acquisition?

b. If a consolidated balance sheet is prepared as of January 1, 2019, what amount of goodwill should be recognized?

c. If a consolidation worksheet is prepared as of January 1, 2019, what Entry S and Entry A should be included?

d. On the separate financial records of the parent company, what amount of investment income would be reported for 2019 under each of the following accounting methods?

• The equity method.
• The partial equity method.
• The initial value method.

e. On the parent company’s separate financial records, what would be the December 31, 2021, balance for the Investment in Taylor Company account under each of the following accounting methods?

• The equity method.
• The partial equity method.
• The initial value method.

f. As of December 31, 2020, Miller’s Buildings account on its separate records has a balance of $932,000 and Taylor has a similar account with a $349,500 balance. What is the consolidated balance for the Buildings account?

g. What is the balance of consolidated goodwill as of December 31, 2021?

h. Assume that the parent company has been applying the equity method to this investment. On December 31, 2021, the separate financial statements for the two companies present the following information:

	Miller Company				Taylor Company
Common stock	$	582,500			$	337,000
Additional paid-in capital		326,200				101,100
Retained earnings, 12/31/21		722,300				482,100

What will be the consolidated balance of each of these accounts?

3. Padre, Inc., buys 80 percent of the outstanding common stock of Sierra Corporation on January 1, 2021, for $826,240 cash. At the acquisition date, Sierra’s total fair value, including the noncontrolling interest, was assessed at $1,032,800 although Sierra’s book value was only $645,000. Also, several individual items on Sierra’s financial records had fair values that differed from their book values as follows:

	Book Value				Fair Value
Land	$	66,400			$	327,400
Buildings and equipment (10-year remaining life)		360,000				340,000
Copyright (20-year remaining life)		146,000				280,000
Notes payable (due in 8 years)		(196,000	)			(183,200	)

For internal reporting purposes, Padre, Inc., employs the equity method to account for this investment. The following account balances are for the year ending December 31, 2021, for both companies.

	Padre				Sierra
Revenues	$	(1,534,940	)		$	(675,900	)
Cost of goods sold		756,000				424,000
Depreciation expense		354,000				18,600
Amortization expense		0				7,300
Interest expense		53,500				9,000
Equity in income of Sierra		(168,560	)			0
Net income	$	(540,000	)		$	(217,000	)
Retained earnings, 1/1/21	$	(1,377,500	)		$	(485,000	)
Net income		(540,000	)			(217,000	)
Dividends declared		260,000				65,000
Retained earnings, 12/31/21	$	(1,657,500	)		$	(637,000	)
Current assets	$	1,066,700			$	648,500
Investment in Sierra		942,800				0
Land		316,000				66,400
Buildings and equipment (net)		919,000				341,400
Copyright		0				138,700
Total assets	$	3,244,500			$	1,195,000
Accounts payable	$	(282,000	)		$	(202,000	)
Notes payable		(555,000	)			(196,000	)
Common stock		(300,000	)			(100,000	)
Additional paid-in capital		(450,000	)			(60,000	)
Retained earnings (above)		(1,657,500	)			(637,000	)
Total liabilities and equities	$	(3,244,500	)		$	(1,195,000	)

At year-end, there were no intra-entity receivables or payables.

Prepare a worksheet to consolidate the financial statements of these two companies. (For accounts where multiple consolidation entries are required, combine all debit entries into one amount and enter this amount in the debit column of the worksheet. Similarly, combine all credit entries into one amount and enter this amount in the credit column of the worksheet. Input all amounts as positive values.)

Answer 1

1a. Amount of equity method income would Matthew recognize in 2021 from its ownership interest in Lindman:

M's share in L's reported income ($219,000*30%)	$65,700
Add:Intra entity gain recoginsed on 2020 transfer	$1,320
Less: Amortization associated with acquisition	($10,400)
Less:Intra--entity gain deferred on 2021 transfer	($3,168)
Equity income recoginsed by M in 2021	$53,452

Intra-entity recognised on 2020 transfer has been computed as follows:-

Selling price of inventory sold by L to M in 2020	$44,000
Less: Cost of inventory sold by L to M in 2020	$26,400
Gross Porfit	$17,600
Percentage of inventory not consumed by M in 2020	25
Unrealized gross profit in 2020 ($17,600*25%)	$4,400
M;s share in L's ownership	30
Unrealised intra-entity gain deferred from 2020 to 2021 ($4,400*30%)	$1,320

Intra-entity gain deferred on 2021 transfer has been computed as follows:-

Selling price of inventory sold by L to M in 2021	$60,000
Cost of inventory sold by L to M in 2021	$33,600
Gross Profit	$26,400
Percentage of inventory not consumed by M in 2021	40
Unrealised gross profit in 2021 ($26,400*40%)	$10,560
M's share in L's ownership	30
Unrealised intra-entity gain deferred from 2021 to 2022 ($10,560*30%)	$3,168

1b. The equity method balance in the investment in L account at the end of 2021 should be computed as follows:

Invenstment in L on 1/1/2021	$347,000
Add:Equity income in 2021	$53,452
Less: Dividends received from L in 2021 ($73,000*30%)	($21,900)
Investment in L,12/31/2021	$378,552

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