Comprehensive Problem: Intercorporate Transfers
Rossman Corporation holds 75 percent of the common stock of Schmid Distributors Inc., purchased on December 31, 20X1, for $2,340,000. At the date of acquisition, Schmid reported common stock with a par value of $1,000,000, additional paid-in capital of $1,350,000, and retained earnings of $620,000. The fair value of the noncontrolling interest at acquisition was $780,000. The differential at acquisition was attributable to the following items:
Inventory (sold in 20X2) | $ 30,000 |
Land | 56,000 |
Goodwill | 64,000 |
Total Differential | $150,000 |
During 20X2, Rossman sold a plot of land to Schmid at a gain of $23,000 that it had purchased several years before; Schmid continues to hold the land. In 20X6, Rossman and Schmid entered into a five-year contract under which Rossman provides management consulting services to Schmid on a continuing basis; Schmid pays Rossman a fixed fee of $80,000 per year for these services. At December 31, 20X8, Schmid owed Rossman $20,000 as the final 20X8 quarterly payment under the contract.
On January 2, 20X8, Rossman paid $250,000 to Schmid to purchase equipment that Schmid was then carrying at $290,000. Schmid had purchased that equipment on December 27, 20X2, for $435,000. The equipment is expected to have a total 15-year life and no salvage value. The amount of the differential assigned to goodwill has not been impaired.
At December 31, 20X8, trial balances for Rossman and Schmid appeared as follows:
| Rossman Corporation | Schmid Distributors Inc. | ||
Item | Debit | Credit | Debit | Credit |
Cash | $ 50,700 |
| $ 38,000 |
|
Current Receivables | 101,800 |
| 89,400 |
|
Inventory | 286,000 |
| 218,900 |
|
Investment in Schmid Stock | 2,980,000 |
|
|
|
Land | 400,000 |
| 1,200,000 |
|
Buildings and Equipment | 2,400,000 |
| 2,990,000 |
|
Cost of Goods Sold | 2,193,000 |
| 525,000 |
|
Depreciation and Amortization | 202,000 |
| 88,000 |
|
Other Expenses | 1,381,000 |
| 227,000 |
|
Dividends Declared | 50,000 |
| 20,000 |
|
Accumulated Depreciation |
| $ 1,105,000 |
| $ 420,000 |
Current Payables |
| 86,200 |
| 76,300 |
Bonds Payable |
| 1,000,000 |
| 200,000 |
Common Stock |
| 100,000 |
| 1,000,000 |
Additional Paid-in Capital |
| 1,272,000 |
| 1,350,000 |
Retained Earnings, January 1 |
| 1,474,800 |
| 1,400,000 |
Sales |
| 4,801,000 |
| 985,000 |
Other Income or Loss |
| 90,000 | 35,000 |
|
Income from Subsidiary |
| 115,500 |
|
|
Total | $10,044,500 | $10,044,500 | $5,431,300 | $5,431,300 |
As of December 31, 20X8, Schmid had declared but not yet paid its fourth-quarter dividend of $5,000. Both companies use straight-line depreciation and amortization. Rossman uses the fully adjusted equity method to account for its investment in Schmid.
Required
a.Compute the amount of the differential as of January 1, 20X8.
b.Verify the balance in Rossman’s Investment in Schmid Stock account as of December 31, 20X8.
c.Present all elimination entries that would appear in a three-part consolidation worksheet as of December 31, 20X8.
d.Prepare and complete a three-part worksheet for the preparation of consolidated financial statements for 20X8.
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