Politan Company acquired an 80 percent interest in Soludan Company on January 1,2012. Any portion of Soludan’s business fair value in excess of its corresponding book value was assigned to trademarks. This intangible asset has subsequently undergone annual amortization based on a 15-year life. Over the past two years, regular intra-entity inventory sales transpired between the two companies, No payment has yet been made on the latest transfer.
Following are the individual financial statements for the two companies as well as consolidated totals for 2013:
| Politan Company | Soludan Company | Consolidated Totals |
Sales | $ (800,000) | $(600,000) | $(1,280,000) |
Cost of goods sold | 500,000 | 400,000 | 784,000 |
Operating expenses | 100,000 | 100,000 | 202,500 |
Income of Soludan | (80,000) | -0- | -0- |
Separate company net income | $ (280,000) | $(100,000) |
|
Consolidated net income |
|
| $ (293,500) |
Noncontrolling interest in |
|
|
|
Soludan Company’s income |
|
| 18,700 |
Controlling interest in |
|
|
|
consolidated net income |
|
| $ (274,800) |
Retained earnings, 1/1/13 | $ (620,000) | $(290,000) | $ (611,600) |
Net income (above) | (280,000) | (100,000) | (274,800) |
Dividends paid | 70,000 | 20,000 | 70,000 |
Retained earnings, 12/31/13 | $ (830,000) | $(370,000) | $ (816,400) |
Cash and receivables | $ 290,000 | $ 90,000 | $ 360,000 |
Inventory | 190,000 | 160,000 | 338,000 |
Investment in Soludan Company | 390,000 | -0- | -0- |
Land, buildings, and equipment | 380,000 | 260,000 | 640,000 |
Trademarks | -0- | -0- | 32,500 |
Total assets | $ 1,250,000 | $510,000 | 1,370,500 |
Liabilities | $ (270,000) | $ (60,000) | (310,000) |
Noncontrolling interest in |
|
|
|
Soludan Company | -0- | -0- | (94,100) |
Common stock | (120,000) | (80,000) | (120,000) |
Additional paid-in capital | (30,000) | -0- | (30,000) |
Retained earnings (above) | (830,000) | (370,000) | (816,400) |
Total liabilities and equities | $(1,250,000) | $(510,000) | $(1,370,500) |
a.What method does Politan use to account for its investment in Soludan?
b. What is the balance of the unrealized inventory gross profit deferred at the end of the current period?
c. What amount was originally allocated to the trademarks?
d. What is the amount of the current year intra-entity inventory sales?
e. Were the intra-entity inventory sales made upstream or downstream?
f. What is the balance of the intra-entity liability at the end of the current year?
g. What unrealized gross profit was deferred into the current year from the preceding period?
h. The beginning consolidated Retained Earnings account shows a balance of $611,600 rather than the $620,000 reported by the parent. What creates this difference?
i. How was the ending Noncontrolling Interest in Soludan Company computed?
j. With a tax rate of 40 percent, what income tax journal entry is recorded if the companies prepare a consolidated tax return?
k. With a tax rate of 40 percent, what income tax journal entry is recorded if these two companies prepare separate tax returns?
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