On January 1, 2016, Patrick Company purchased 60% of the common stock of Solomon Company for $180,000 . On this date, Solomon had common stock, other paid-in capital, and retained earnings of $20,000, $60,000, and $120,000 respectively.

On January 1, 2016, the only tangible asset of Solomon that was undervalued was land, which was worth $15,000 more than book value. On January 1, 2017, Patrick

Company purchased an additional 30% of the common stock of Solomon Company for $140,000 . Net income and dividends for 2 years for Solomon Company were: 2016 2017 Net income for year $50,000 $80,000 Dividends, paid-in December 0 50,000 In the last quarter of 2017, Solomon sold $80,000 of goods to Patrick, at a gross profit rate of 30%. On December 31, 2017, $20,000 of these goods are in Patrick's ending inventory. In both 2016 and 2017, Patrick has accounted for its investment in Solomon using the simple equity method. Required: a. Using the information from the scenario or on the separate worksheet, prepare necessary determination and distribution of excess schedules for the two purchases.
b. Complete the Figure 7-2 worksheet for consolidated financial statements for 2017 .Figure 7-2Trial Balance Eliminations andPatrick Solomon AdjustmentsAccount Titles Company Company Debit CreditInventory, December 31 80,000 50,000Other Current Assets 135,000Invest in Solomon. Co 377,000Other Long-Term Investments100,000Land 70,000 50,000Buildings and Equipment 300,000 220,000Accumulated Depreciation (100,000) (60,000)GoodwillCurrent Liabilities (70,000) (30,000)Long-Term Liabilities (80,000) (50,000)Common Stock – P Co. (100,000)Pd-in Cap in Exc - P Co. (200,000)Retained Earnings – P Co. (280,000)Common Stock – S Co.(20,000)Other Pd-in Capt – S C(60,000)Retained Earnings – S Co.(170,000)Net Sales (520,000) (450,000)Cost of Goods Sold 300,000 270,000Operating Expenses 120,000 100,000Subsidiary Income (72,000)Div Declared – P Co. 40,000Div Declared – S Co.50,000Consolidated Net IncomeTo NCI


To Controlling

Total NCI

Controlling RE 12/31

0 0

Consol.
Control. Consol.

Income
Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory, December 31

Other Current Assets

Invest in Solomon. Co

Other Long-Term Investments

Land

Buildings and Equipment

Accumulated Depreciation

Goodwill

Current Liabilities

Long-Term Liabilities

Common Stock – P Co.

Pd-in Cap in Exc – P Co.

Retained Earnings – P Co.

Common Stock – S Co.

Other Pd-in Capt – S C

Retained Earnings – S Co.

Net Sales

Cost of Goods Sold

Operating Expenses

Subsidiary Income

Div Declared – P Co.

Div Declared – S Co.

Consolidated Net Income

To NCI

To Controlling

Total NCI

Controlling RE 12/31

D&D schedule for first acquisition:

Entity Parent NCI
Entity Fair Value 300,000 180,000 120,000
Book value:

Paid-In Capital - Common 80,000

Retained Earnings 120,000

Book value: 200,000 120,000 80,000
Excess 100,000 60,000 40,000
Adjustments:

Land 15,000

Goodwill 85,000

Total 100,000

Analysis of second acquisition:
Price paid for additional block $ 140,000
Book value of NCI purchased:

Paid-In Capital $ 80,000

Retained Earnings on 1/1/17 170,000

$ 250,000

´ 30% 75,000
Excess of cost over book 65,000
Excess attributable to NCI change:

Original excess* 100,000

´ 30% 30,000
Balance, adjust to Parent pd-in capital
in excess of par
$ 35,000
*excess is attributable to assets that are not subject to amortization

b. For the worksheet solution, please refer to Answer 7-2.

Answer 7-2

Trial Balance Eliminations and

Patrick Solomon Adjustments
Account Titles Company Company Debit Credit
Inventory, December 31 80,000 50,000

EI 6,000
Other Current Assets 135,000

Invest in Solomon. Co 377,000

CY 27,000

EL 225,000

D1 60,000

D2 65,000
Other Long-Term Investments
100,000

Land 70,000 50,000 D1 15,000

Buildings and Equipment 300,000 220,000

Accumulated Depreciation (100,000) (60,000)

Goodwill

D1 85,000

Current Liabilities (70,000) (30,000)

Long-Term Liabilities (80,000) (50,000)

Common Stock – P Co. (100,000)

Pd-in Cap in Exc – P Co. (200,000)
D2 35,000

Retained Earnings – P Co. (280,000)

Common Stock – S Co.
(20,000) EL 18,000

Other Pd-in Capt – S C
(60,000) EL 54,000

Retained Earnings – S Co.
(170,000) EL 153,000 D1 40,000

D2 30,000

Net Sales (520,000) (450,000) IS 80,000

Cost of Goods Sold 300,000 270,000 EI 6,000 IS 80,000
Operating Expenses 120,000 100,000

Subsidiary Income (72,000)
CY 72,000

Div Declared – P Co. 40,000

Div Declared – S Co.
50,000

CY 45,000

Consolidated Net Income

To NCI

To Controlling

Total NCI

Controlling RE 12/31

0 0
548,000
548,000

Consol.
Control. Consol.

Income
Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory, December 31

124,000
Other Current Assets

135,000
Invest in Solomon. Co

0

Other Long-Term Investments

100,000

Land

135,000
Buildings and Equipment

520,000
Accumulated Depreciation

(160,000)
Goodwill

85,000

Current Liabilities

(100,000)
Long-Term Liabilities

(130,000)

Common Stock – P Co.

(100,000)
Pd-in Cap in Exc – P Co.

(165,000)
Retained Earnings – P Co.

(280,000)

Common Stock – S Co.
(2,000)

Other Pd-in Capt – S C
(6,000)

Retained Earnings – S Co.
(27,000)

Net Sales (890,000)

Cost of Goods Sold 496,000

Operating Expenses 220,000

Subsidiary Income 0

Div Declared – P Co.

40,000

Div Declared – S Co.
5,000

Consolidated Net Income (174,000)

To NCI 7,400 (7,400)

To Controlling 166,600
(166,600)

Total NCI
(37,400)
(37,400)
Controlling RE 12/31

(406,600) (406,600)

0

Eliminations and Adjustments:

CY Eliminate the current-year entries made for investment income and dividends

EL Eliminate 90% of Solomon Company equity balances at the beginning of the year against the investment account.

D1 Distribute the $100,000 excess cost as required by the determination and distribution of excess schedule. [$180,000 / 60% = $300,000 - ($20,000 + $60,000 + $120,000)]

D2 Distribute the excess of cost over book value on the 1/1/17 investment

IS Eliminate the intercompany sale and purchase.

EI Eliminate the $6,000 of gross profit in the ending inventory.($20,000 x 30%)

Subsidiary Company Income Distribution Schedule
Deferred profit in ending inventory 6,000 Internally generated net income 80,000

Adjusted income 74,000

NCI Share 10%

NCI 7,400

Parent Company Income Distribution Schedule

Internally generated net income 100,000

90% × Sub's adjusted income 66,600

Controlling interest 166,600