Question

Problem 5-26 (LO 5-3, 5-4, 5-5, 5-7)

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.

1. Prepare worksheet entries to consolidate these two companies as of December 31, 2018.
2. Compute the net income attributable to the noncontrolling interest for 2018

Answer 1

Amortization of Excess Fair Value allocated to specified Assets Value As on Remaining Useful life in Amortization per 01/01/2016 (A) years (B 61,000 21,000 82,000 Assets Contract Building Total ear (A/B) 20 10 3,050 2,100 5,150 Carrying Value of the specified assets as on 01/01/18 Accumulated Amortization for 2 years i.e. 2016-17 Value As on (Amoiation x 2 years) Carrying Value as on 01/01/2016 (A) (B) 01/01/18 (A-B) Assets Contract Building Total 61,000 21,000 82,000 6,100 4,200 54,900 16,800 71,700 Calculation of Deferred Profit on Intercompany Inventory Sold (Upstream Transfer Price Cost Gross Profit Profit % Ending Inventory Deferred Profit |(E) [D=(C/A)x100] [C-A-B] Year 30% 40% 2017 2018 16,000 21,000 11,200 12,600 4,800 8,400 6,000 10,500 1,800 4,200

Calculation of Gain on Intercompany Sale of Equipment (Downstream Original Cost Book Value of Equipment Sold (A) Sale price of Equipment (B) Gain on Sale of Equipment (B-A) Remaining Life in vears Excess Amortization per year (3,300/5 Unamortized Gain (3,300 660 17,000 9,200 12,500 3,300 660 2,640 Calculation of Equity Income from Subsidia 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: Depreciation adjustment from 2017 downstream fixed asset sale Equity Income from Sledge 11,515 660 12,175

Entries Entries Accounts titles and Explanation Debit S.No Credit 1 *G Retained Earnings, 01/01/18 (Sledge 1,800 Cost of goods sold 1,800 (to remove intra-entity gross profit from beginning account balance) 2 TA Equipment (17,000 12,500 4,500 2,640 Investment in Seldge Accumulated Depreciation (to adjust the equipment balance to the original cost (35,000) and accordingly adjust the accumulated Depreciation balance 7,140 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 3 S 130,000 268,200 278,740 119,460 4 A Contract 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 54,900 16,800 50,190 21,510 Equity Income of Sledge Investment in Sledge (to remove the parent's equity method income) 12,175 12,175

6E Amortization Expense Depreciation expense Contract Buildin (to recognize 2018 excess amortization 3,050 2,100 3,050 2,100 Sales Cost of goods sold (to eliminate the intra-entity inventory tranfers during 2018) 기TI 21,000 21,000 Cost of Goods sold Invento (to remove the intra-entity gross profit from the ending account balances) 8 G 4,200 4,200 Accumulated Depreciation Depreciation expenses (to eliminate the excess depreciation on equipment recorded at transfer price.) 9 ED 660 660 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 (16450x 30%) 140,000 75,000 (41,000) 24,000 1,800 4,200 (5,150) 16,450 4,935