39. On January 1, 20X1, Powers Company acquired 80% of the common stock of Sculley Company for
$195,000. On this date Sculley had total owners’ equity of $200,000 (common stock, other paid-in capital, and
retained earnings of $10,000, $90,000, and $100,000 respectively).
Any excess of cost over book value is attributable to inventory (worth $6,250 more than cost), to equipment
(worth $12,500 more than book value), and to patents. FIFO is used for inventories. The equipment has a
remaining life of five years and straight-line depreciation is used. The excess to the patents is to be amortized
over 20 years.
On July 1, 20X2 Sculley borrowed $100,000 from Powers with a 10% 1-year note; interest is due at maturity.
On January 1, 20X2, Powers held merchandise acquired from Sculley for $10,000. During 20X2, Sculley sold
merchandise to Powers for $50,000, $20,000 of which is still held by Powers on December 31, 20X2. Sculley’s
usual gross profit on affiliated sales is 50%.
On December 31, 20X1, Powers sold equipment to Sculley at a gain of $10,000. During 20X2, the equipment
was used by Sculley. Depreciation is being computed using the straight-line method, a five-year life, and no
salvage value.
Both companies have a calendar-year fiscal year.
Assume that during 20X1 and 20X2, Powers has appropriately accounted for its investment in Sculley using the
cost method.
Required:
a.
Using the information above or on the Figure 4-5 worksheet, prepare a determination and distribution of excess schedule.
b.
Complete the Figure 4-5 worksheet for consolidated financial statements for the year ended December 31, 20X2.
Figure 4-5
Trial Balance
Eliminations and
Powers
Sculley
Adjustment
s
Account Titles
Company
Company
Debit
Credit
Inventory, December 31
145,000
55,000
Other Current Assets
249,000
205,000
Investment in Sub. Company
195,000
Land
140,000
100,000
Buildings and Equipment
400,000
200,000
Accumulated Depreciation
(150,000)
(50,000)
Current Liabilities
(150,000)
(120,000)
Bonds Payable
(100,000)
(50,000)
Other Long-Term Liabilities
(50,000)
(20,000)
Common Stock – P Co.
(100,000)
Other Paid in Capital – P Co.
(200,000)
Retained Earnings – P Co.
(310,000)
Common Stock – S Co.
(10,000)
Other Paid in Capital – S Co.
(90,000)
Retained Earnings – S Co.
(150,000)
Net Sales
(610,000)
(365,000)
Cost of Goods Sold
360,000
190,000
Operating Expenses
150,000
70,000
Interest Revenue
(5,000)
Interest Expense
5,000
Dividend Income
(24,000)
Dividends Declared – P Co.
60,000
Dividends Declared – S Co.
30,000
Consolidated Net Income
NCI
Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
0
0
(continued)
Consol.
Control.
Consol.
Income
Retained
Balance
Account Titles
Statement
NCI
Earnings
Sheet
Inventory, December 31
Other Current Assets
Investment in Sub. Company
Land
Buildings and Equipment
Accumulated Depreciation
Current Liabilities
Bonds Payable
Other Long-Term Liabilities
Common Stock – P Co.
Other Paid in Capital – P Co.
Retained Earnings – P Co.
Common Stock – S Co.
Other Paid in Capital – S Co.
Retained Earnings – S Co.
Net Sales
Cost of Goods Sold
Operating Expenses
Interest Revenue
Interest Expense
Dividend Income
Dividends Declared – P Co.
Dividends Declared – S Co.
Consolidated Net Income
NCI
Controlling Interest
Total NCI
Ret. Earn. Contr. Int. 12-31
a.
40. On January 1, 20X1, Pep Company acquired 80% of the common stock of Sky Company for $195,000. On
this date Sky had total owners’ equity of $200,000 (common stock, other paid-in capital, and retained earnings
of $10,000, $90,000, and $100,000 respectively).
Any excess of cost over book value is attributable to inventory (worth $6,250 more than cost), to equipment
(worth $12,500 more than book value), and to patents. FIFO is used for inventories. The equipment has a
remaining life of five years and straight-line depreciation is used. The excess attributable to the patents is to be
amortized over 20 years.
During 20X1 and 20X2, Pep has appropriately accounted for its investment in Sky using the simple equity
method.
On January 1, 20X2, Pep held merchandise acquired from Sky for $10,000. During 20X2, Sky sold
merchandise to Pep for $50,000, $20,000 of which is still held by Pep on December 31, 20X2. Sky’s usual gross
profit on affiliated sales is 50%.
On December 31, 20X1, Pep sold equipment to Sky at a gain of $10,000. During 20X2, the equipment was used
by Sky. Depreciation is being computed using the straight-line method, a five-year life, and no salvage value.
Required:
a.
Using the information above or on the Figure 4-6 worksheet, prepare a determination and distribution of excess schedule.
b.
Complete the Figure 4-6 worksheet for consolidated financial statements for the year ended December 31, 20X2.
Figure 4-6
Trial Balance
Eliminations and
Pep
Sky
Adjustment
s
Statement – Accounts
Company
Company
Debit
Debit
Credit
Income Statement:
Net Sales
(610,000)
(365,000)
Cost of Goods Sold
360,000
190,000
Operating Expenses
150,000
70,000
Subsidiary Income
(84,000)
Net Income
(184,000)
(105,000)
NCI Interest
NCI
NCI
NCI
Controlling interest
Retained Earnings Statement:
Balance, January 1 – P Co.
(350,000)
Balance, January 1 – S Co.
(150,000)
Net Income (From Above)
(184,000)
(105,000)
Dividends Declared – P Co.
60,000
Dividends Declared – S Co.
30,000
Balance, December 31
(474,000)
(225,000)
Consolidated Balance Sheet:
Inventory, December 31
140,000
60,000
Other Current Assets
249,000
205,000
Investment in Sub. Company
295,000
Land
140,000
100,000
Building and Equipment
400,000
200,000
Accumulated Depreciation
(150,000)
(50,000)
Current Liabilities
(150,000)
(120,000)
Bonds Payable
(100,000)
(50,000)
Other Long-Term Liabilities
(50,000)
(20,000)
Common Stock – P Co.
(100,000)
Other Paid in Capital – P Co.
(200,000)
Common Stock – S Co.
(10,000)
Other Paid in Capital – S Co.
(90,000)
Retained Earnings – 12/31
(474,000)
(225,000)
(From Above)
Total NCI
0
0
(continued)
Consol.
Financial
Statement – Accounts
NCI
Statements
Income Statement:
Net Sales
Cost of Goods Sold
Operating Expenses
Subsidiary Income
NCI in Income
Net Income
Retained Earnings Statement:
Balance, January 1 – P Co.
Balance, January 1 – S Co.
Net Income (From Above)
Dividends Declared – P Co.
Dividends Declared – S Co.
Balance, December 31
Consolidated Balance Sheet:
Inventory, December 31
Other Current Assets
Investment in Sub. Company
Land
Building and Equipment
Accumulated Depreciation
Current Liabilities
Bonds Payable
Other Long-Term Liabilities
Common Stock – P Co.
Other Paid in Capital – P Co.
Common Stock – S Co.
Other Paid in Capital – S Co.
Retained Earnings – 12/31
(From Above)
Total NCI
41. For each of the following intercompany transactions, state the principle to be used in accounting for
intercompany gains on current and future consolidated income statements:
a.
Gains on merchandise sales
b.
Gains on the sale of land
c.
Gains on the sale of depreciable fixed assets
d.
Interest on intercompany notes
the time of a sale of the asset to an outside party is recognized at the time of the sale.