Comprehensive Problem: Intercorporate Transfers (Modified Equity Method)
Topp Manufacturing Company acquired 90 percent of Bussman Corporation's outstanding common stock on December 31, 20X5, for $1,152,000. At that date, the fair value of the noncontrolling interest was $128,000, and Bussman reported common stock outstanding of $500,000, premium on common stock of $280,000, and retained earnings of $420,000. The book values and fair values of Bussman's assets and liabilities were equal, except for land, which was worth $30,000 more than its book value.
On April 1, 20X6, Topp issued at par $200,000 of 10 percent bonds directly to Bussman; interest on the bonds is payable March 31 and September 30. On January 2, 20X7, Topp purchased all of Bussman's outstanding 10-year, 12 percent bonds from an unrelated institutional investor at 98. The bonds originally had been issued on January 2, 20X1, for 101. Interest on the bonds is payable December 31 and June 30.
Since the date it was acquired by Topp Manufacturing, Bussman has sold inventory to Topp on a regular basis. The amount of such intercompany sales totaled $64,000 in 20X6 and $78,000 in 20X7, including a 30 percent gross profit. All inventory transferred in 20X6 had been resold by December 31, 20X6, except inventory for which Topp had paid $15,000 and did not resell until January 20X7. All inventory transferred in 20X7 had been resold at December 31, 20X7, except merchandise for which Topp had paid $18,000.
At December 31, 20X7, trial balances for Topp and Bussman appeared as follows:
Item | Topp Manufacturing | Bussman Corporation | ||
Debit | Credit | Debit | Credit | |
Cash | $ 39,500 |
| $ 29,000 |
|
Current Receivables | 112,500 |
| 85,100 |
|
Inventory | 301,000 |
| 348,900 |
|
Investment in Bussman Stock | 1,251,000 |
|
|
|
Investment in Bussman Bonds | 985,000 |
|
|
|
Investment in Topp Bonds |
|
| 200,000 |
|
Land | 1,231,000 |
| 513,000 |
|
Buildings and Equipment | 2,750,000 |
| 1,835,000 |
|
Cost of Goods Sold | 2,009,000 |
| 430,000 |
|
Depreciation and Amortization | 195,000 |
| 85,000 |
|
Other Expenses | 643,000 |
| 206,000 |
|
Dividends Declared | 50,000 |
| 40,000 |
|
Accumulated Depreciation |
| $1,210,000 |
| $ 619,000 |
Current Payables |
| 98,000 |
| 79,000 |
Bonds Payable |
| 200,000 |
| 1,000,000 |
Premium on Bonds Payable |
|
|
| 3,000 |
Common Stock |
| 1,000,000 |
| 500,000 |
Premium on Common Stock |
| 700,000 |
| 280,000 |
Retained Earnings, January 1 |
| 3,033,000 |
| 470,000 |
Sales |
| 3,101,000 |
| 790,000 |
Other Income |
| 135,000 |
| 31,000 |
Income from Bussman |
| 90,000 |
|
|
Total | $9,567,000 | $9,567,000 | $3,772,000 | $3,772,000 |
As of December 31, 20X7, Bussman had declared but not yet paid its fourth-quarter dividend of $10,000. Both Topp and Bussman use straight-line depreciation and amortization, including the amortization of bond discount and premium. On December 31, 20X7, Topp's management reviewed the amount attributed to goodwill as a result of its purchase of Bussman common stock and concluded that an impairment loss in the amount of $25,000 had occurred during 20X7 and should be shared proportionately between the controlling and noncontrolling interests. Topp uses the modified equity method to account for its investment in Bussman.
Required
a.Compute the amount of the goodwill as of January 1, 20X7.
b.Compute the balance of Topp's Investment in Bussman Stock account as of January 1, 20X7.
c.Compute the gain or loss on the constructive retirement of Bussman's bonds that should appear in the 20X7 consolidated income statement.
d.Compute the income that should be assigned to the noncontrolling interest in the 20X7 consolidated income statement.
e.Compute the total noncontrolling interest as of December 31, 20X6.
f.Present all elimination entries that would appear in a three-part consolidation worksheet as of December 31, 20X7.
g. Prepare and complete a three-part worksheet for the preparation of consolidated financial statements for 20X7.
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