Chapter 02 – Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with no Differential
Common stock
Retained earnings
Income from Round Corp.
Dividends declared
25,000
E2-17 Basic Consolidation Entries for Fully Owned Subsidiary
a.
Equity Method Entries on Purple Co.’s Books:
Investment in Amber Corp.
500,000
Cash
500,000
Record the initial investment in Amber Corp.
Investment in Amber Corp.
50,000
Income from Amber Corp.
50,000
Record Purple Co.’s 100% share of Amber Corp.’s 20X7 income
Cash
20,000
Investment in Amber Corp.
20,000
Record Purple Co.’s 100% share of Amber Corp.’s 20X7 dividend
Book Value Calculations:
Total
Book Value
=
Common
Stock
+
Retained
Earnings
Original book
value
500,000
300,000
200,000
+ Net Income
50,000
50,000
– Dividends
(20,000)
(20,000)
Ending book value
530,000
300,000
230,000
E2-16 (continued)
Basic Consolidation Entry
Investment in Round Corp.
455,000
Chapter 02 – Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with no Differential
1/1/X7
Goodwill = 0
Identifiable
excess = 0
$500,000
Initial
investment
in Amber
Corp.
Book value =
CS + RE =
500,000
12/31/X7
Goodwill = 0
Identifiable
excess = 0
$530,000
Net
investment
in Amber
Corp.
Book value =
CS + RE =
530,000
E2-17 (continued)
Investment in
Income from
Amber Corp.
Amber Corp.
Acquisition
Price
500,000
Net Income
50,000
50,000
Net Income
20,000
Dividends
Ending Balance
530,000
50,000
Ending Balance
530,000
Basic
50,000
0
0
Basic Consolidation Entry
Common stock
300,000
Retained earnings
200,000
Income from Amber Corp.
50,000
Dividends declared
20,000
Investment in Amber Corp.
530,000
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P2-18 Retroactive Recognition
(1)
Investment in Fast Track Enterprises Stock
34,000
Cash
34,000
Record purchase of Fast Track stock.
(2)
Investment in Fast Track Enterprises Stock
11,000
Retained Earnings
11,000
Record pick-up of difference between
cost and equity income:
20X2
.10($40,000 – $20,000)
$ 2,000
20X3
.10($60,000 / 2)
$3,000
.15[($60,000 / 2) – $20,000]
1,500
4,500
20X4
.15($40,000 – $10,000)
4,500
Amount of increase
$11,000
(3)
Cash
5,000
Investment in Fast Track Enterprises Stock
5,000
Record dividend from Fast Track Enterprises: $20,000 x .25
(4)
Investment in Fast Track Enterprises Stock
12,500
Income from Fast Track Enterprises
12,500
Record equity-method income: $50,000 x .25
P2-19 Fair Value Method
20X6
20X7
20X8
a. Cost method:
Dividend income
$ 3,000
$ 6,000
$ 4,000
Balance in investment account
$70,000
$70,000
$70,000
Investment income:
$40,000 x .20
$ 8,000
$35,000 x .20
$ 7,000
$60,000 x .20
$12,000
Balance in investment account:
Balance at January 1
$70,000
$75,000
$76,000
Investment income
8,000
7,000
12,000
Dividends received
(3,000)
(6,000)
(4,000)
Balance at December 31
$75,000
$76,000
$84,000
Chapter 02 – Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with no Differential
Diversified Products Corporation
Retained Earnings Statement
Year Ended December 31, 20X8
Retained Earnings, January 1, 20X8
$260,000
20X8 Net Income
89,000
$349,000
Dividends Declared, 20X8
(10,000)
Retained Earnings, December 31, 20X8
$339,000
b. Wealthy Manufacturing Company
Income Statement
Year Ended December 31, 20X8
Net Sales
$850,000
Cost of Goods Sold
(670,000)
Gross Profit
$180,000
Other Expenses
$(90,000)
Income from Continuing Operations of
Diversified Products Corporation
26,000
(64,000)
Income from Continuing Operations
$116,000
Discontinued Operations:
Share of Operating Loss Reported by
Diversified Products on Discontinued
Division
$ (6,000)
Share of Gain on Sale of Division
Reported by Diversified Products
17,600
11,600
Income before Extraordinary Item
$127,600
Extraordinary Item:
Share of Loss on Volcanic Activity
Reported by Diversified Products
(2,000)
Net Income
$125,600
Wealthy Manufacturing Company
Retained Earnings Statement
Year Ended December 31, 20X8
Retained Earnings, January 1, 20X8
$420,000
20X8 Net Income
125,600
$545,600
Dividends Declared, 20X8
(30,000)
Retained Earnings, December 31, 20X8
$515,600
P2–23 Consolidated Worksheet at End of the First Year of Ownership (Equity Method)
a.
Equity Method Entries on Peanut Co.’s Books:
Investment in Snoopy Co.
300,000
Cash
300,000
Record the initial investment in Snoopy Co.
Investment in Snoopy Co.
75,000
Income from Snoopy Co.
75,000
Record Peanut Co.’s 100% share of Snoopy Co.’s 20X8 income
Cash
20,000
Investment in Snoopy Co.
20,000
Record Peanut Co.’s 100% share of Snoopy Co.’s 20X8 dividend
Book Value Calculations:
Total
Book
Value
=
Common
Stock
+
Retained
Earnings
Beginning book
value
300,000
200,000
100,000
+ Net Income
75,000
75,000
– Dividends
(20,000)
(20,000)
Ending book value
355,000
200,000
155,000
P2–23 (continued)
Basic Consolidation Entry
Common stock
200,000
Retained earnings
100,000
Income from Snoopy Co.
75,000
Dividends declared
20,000
Investment in Snoopy Co.
355,000
Optional accumulated depreciation consolidation entry
Accumulated depreciation
10,000
Buildings & equipment
10,000
The amount of this entry is found by looking at the depreciation expense ($10,000) for the year
and the accumulated depreciation at the end of the year ($20,000). The difference must be what
was in accumulated depreciation at the date of the acquisition. Note that this assumes there were
no sales or other disposals of Buildings and equipment during the year.
Investment in
Income from
Snoopy Co.
Snoopy Co.
Acquisition
Price
300,000
Net Income
75,000
75,000
Net Income
20,000
Dividends
Ending Balance
355,000
75,000
Ending
Balance
355,000
Basic
75,000
0
0
P2–23 (continued)
Peanut
Co.
Snoopy
Co.
Consolidation
Entries
DR
CR
Consolidated
Income Statement
Sales
800,000
250,000
1,050,000
Less: COGS
(200,000)
(125,000)
(325,000)
Less: Depreciation Expense
(50,000)
(10,000)
(60,000)
Less: Other Expenses
(225,000)
(40,000)
(265,000)
Income from Snoopy Co.
75,000
75,000
0
Net Income
400,000
75,000
75,000
0
400,000
Statement of Retained
Earnings
Beginning Balance
225,000
100,000
100,000
225,000
Net Income
400,000
75,000
75,000
0
400,000
Less: Dividends Declared
(100,000)
(20,000)
20,000
(100,000)
Ending Balance
525,000
155,000
175,000
20,000
525,000
Balance Sheet
Cash
130,000
80,000
210,000
Accounts Receivable
165,000
65,000
230,000
Inventory
200,000
75,000
275,000
Investment in Snoopy Co.
355,000
355,000
0
Land
200,000
100,000
300,000
Buildings & Equipment
700,000
200,000
10,000
890,000
Less: Accumulated Depreciation
(450,000)
(20,000)
10,000
(460,000)
Total Assets
1,300,000
500,000
10,000
365,000
1,445,000
Accounts Payable
75,000
60,000
135,000
Bonds Payable
200,000
85,000
285,000
Common Stock
500,000
200,000
200,000
500,000
Retained Earnings
525,000
155,000
175,000
20,000
525,000
Total Liabilities & Equity
1,300,000
500,000
375,000
20,000
1,445,000