Question

Problem 5-33 (LO 5-2, 5-3, 5-4, 5-5, 5-7) On January 1, 2016, Monica Company acquired 70 percent of Young Company's outstanding common stock for $798,000. The fair value of the noncontrolling interest at the acquisition date was $342,000. Young reported stockholders' equity accounts on that date as follows: Common stock-$10 par value Additional paid-in capital Retained earnings $200,000 100,000 660,000 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 $60,000. 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 20 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: Inventory Remaining at Year-End (at transfer Transfer Price $ 60,000 80,000 90,000 price) $35,000 37,000 43,000 Year 2016 2017 2018 In addition, Monica sold Young several pieces of fully depreciated equipment on January 1, 2017, for $61,000. The equipment had originally cost Monica $100,000. Young plans to depreciate these assets over a five-year period. In 2018, Young earns a net income of $230,000 and declares and pays $80,000 in cash dividends. These figures increase the subsidiary's Retained Earnings to a $990,000 balance at the end of 2018. During this same year, Monica reported dividend income of $56,000 and an investment account containing the initial value balance of $798,000. No changes in Young's common stock accounts have occurred since Monica's acquisition. a. Prepare the 2018 consolidation worksheet entries for Monica and Young. b. Compute the net income attributable to the noncontrolIling interest for 2018 Complete this question by entering your answers in the tabs below. Required A Required B view transaction list transaction list No Transaction Accounts Debit Credit Retained earnings, 1/1/18 (Young) 1 Cost of goods sold Retained earnings, 1/1/18 (Monica) 2 2 Equipment Accumulated depreciation Investment in Young 3 Retained earnings, 1/1/18 (Monica) Common stock - Young Additional paid-in capital - Young Retained earnings, 1/1/18 (Young) Investment in Young Noncontrolling interest in Young Franchise agreement Buildings Investment 5 5 in Young Noncontrolling interest in Young Dividend income 6 6 Dividends declared Depreciation expense Amortization expense 7 7 Franchise agreement Buildings Sales Cost of goods sold Cost of goods sold Inventory Accumulated depreciation 10 10 Depreciation expense Required A Required B LO a. Prepare the 2018 consolidation worksheet entries for Monica and Young. b. Compute the net income attributable to the noncontrolling interest for 2018. Complete this question by entering your answers in the tabs below. Required B Required A Compute the net income attributable to the noncontrolling interest for 2018. Net income attributable to noncontrolling interest Required A Required B

Answer 1

|Calculation of Franchise agreement on acquisition Consideration transferred by Monica to young for 70% of share Fair value of Non controlling interest 798,000 342,000 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) (180,000 1,140,000 -200,000 -100,000 -660,000 180,000 60,000 60,000) 120,000 Depreciation/Amoritzation of Excess value of assets acquire Amoritzation Value as on Value as on Value as on 1/1/16 Life (in years) 12/31/2016 12/31/2017 Assets per year (A B E (D-C) D (A-C) C (A/B) Building Franchise agreement 36,000 60,000 12,000 48,000 96.000 120,000 12,000 108,000 10 Total 24,000 180,000 156,000 132,000

Calculation of Deferred profit on intra company sale Inventory Transfer (Upstream) Inventory remaining at year end (A) Deferred Profit Profit % (B) Year C= (A B) 20% 2017 37,000 7,400 43,000 20% 8,600 2018 Equipment transfer (Downstream) Original Cost and Accumulated Depreciation 100,000 Gain on sale of equipment 1/1/2017 Life 61,000 5 Excess Depreciation per year (61,000/5) 12,200 Deferred Gain on equipment 1/1/2018 Gain on sale of equipment 1/1/2017 61,000 Depreciation on equipment per year -12,200 Less: Deferred Gain on equipment 1/1/2018 48,800 Calculation of Retained Earning of Young as on 1/1/2018 Retained Earnings as on 12/31/2018 990,000 Less: Net Income during the year 2018 Add: Dividend 230,000 80,000 Unadjusted Retianed Earnings 1/1/2018 840,000 Less: Removal of deferred profit 1/1/2018 7,400 Adjusted Retained Earnings 1/1/2018 832,600

Calculation of Adjustment of Conversion from Cost to Equity Retained Earnings 01/01/18 832,600 Retained Earnings 01/01/16 -660,000 Increase in Retained Earnings 172,600 Less: Amortization of Excess value for 2 years (24,000 x 2) -48,000 Adjusted Balance 124,600 Share of Monica (124,600 x 70%) 87,220

Consolidation Entries Worksheet Account Titles and Explanation 1Retained Earnings - Young (1/1/2018) Entry Debit Credit No 7,400 Cost of goods sold 7,400 (to recoginze the deferred profit on inventory as on 1/1/18) 2 Retained Earnings, 01/01/18 (Monica) Equipment (100,000-61,000) Accumulated Depreciation - Equipment (100,000- 12,200) (to eliminate the gain on equipment sold as on 1/1/18 and bring back the beginning book value based on historical cost) 48,800 2 39,000 87,800 3 Investment in Young 87,220 Retained Earnings, 01/01/18 (Monica) (to convert from initial value to equity method) 87,220 4 Common Shares Young 200,000 Additional Paid In capital Young 100,000 Retained Earnings - Young (1/1/2018) Investment in young (70%) 832,600 792,820 Non Controlling Interest (30%) 339,780 (to eliminate the equity accounts of subsidiary and recognize interest) non controlling 5 Building Franchise agreement Investment in young (70%) Non Controlling Interest (30%) (to record the unamortized value of excess assets as on 1/1/2017) 5 36,000 96,000 92,400 39,600

6 Dividend Income 56,000 Dividend declared (80,000 x 70%) 56,000 (to eliminate the intra - entity dividend transfers) 7 Amortization Expense 7 12,000 Depreciation expense Building Franchise Agreement 12,000 12,000 12,000 (to record the amortization and depreciation expense during the year 2018) 8 Sales 8 90,000 Cost of goods sold 90,000 (to eliminate the intra company inventory transfer during the year 2018) 9 Cost of goods sold 8,600 Inventory 8,600 (to eliminate the deferred profit on intra company inventory sold as on |12/31/2018) 10 Accumulated Depreciation 12,200 10 Depreciation expense 12,200 (to remove excess depreciation charged on intracompany assets)

b. Calculation of Net Income attributable to Noncontrolling Interest Net Income reported by Young Less: Amortization of Excess value Add: Recognization of Intra entity inventory profit Less: Deferred profit at the end Adjusted Net Income of Young Net Income attributable to Noncontrolling Interest (204,800 x 30%) 230,000 -24,000 7,400 -8,600 204,800 61,440