On January 1, 2016, Parent Company acquired 80% of the common stock of Subsidiary Company for $560,000 . On this date Subsidiary had total owners' equity of $540,000, including retained earnings of $240,000

During 2016, Subsidiary had net income of $60,000 and paid no dividends.

Any excess of cost over book value is attributable to land, undervalued $10,000, and to goodwill.

During 2016 and 2017, Parent has appropriately accounted for its investment in Subsidiary using the cost method.

On January 1, 2017, Parent held merchandise acquired from Subsidiary for $10,000 . During 2017, Subsidiary sold merchandise to Parent for $100,000, of which $20,000 is held by Parent on December 31, 2017 . Subsidiary's usual gross profit on affiliated sales is 40%.

On December 31, 2017, Parent still owes Subsidiary $20,000 for merchandise acquired in December.

On January 1, 2017, Parent sold to Subsidiary some equipment with a cost of $50,000 and a book value of $20,000 . The sales price was $40,000 . Subsidiary is depreciating the equipment over a five-year life, assuming no salvage value and using the straight-line method.

Required:

Complete the Figure 4-4 worksheet for consolidated financial statements for the year ended December 31, 2017 .

Figure 4-4

Trial Balance Eliminations and

Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Inventory, December 31 100,000 80,000

Other Current Assets 253,000 450,000

Investment in Sub. Company 560,000

Other Long-Term Investments 50,000 30,000

Land 140,000 70,000

Buildings and Equipment 315,000 400,000

Accumulated Depreciation (208,000) (110,000)

Other Intangibles 60,000

Current Liabilities (150,000) (100,000)

Bonds Payable (100,000)

Premium on Bonds Payable (5,000)

Other Long-Term Liabilities (200,000) (150,000)

Common Stock – P Co. (200,000)

Other Paid in Capital – P Co. (100,000)

Retained Earnings – P Co. (421,000)

Common Stock – S Co.
(100,000)

Other Paid in Capital – S Co.
(200,000)

Retained Earnings – S Co.
(300,000)

Net Sales (600,000) (380,000)

Cost of Goods Sold 350,000 180,000

Operating Expenses 140,000 100,000

Dividend Income (24,000)

Gain on Sale of Equipment (20,000)

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

Consol.
Control. Consol.

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

Other Current Assets

Investment in Sub. Company

Other Long-Term Investments

Land

Buildings and Equipment

Accumulated Depreciation

Other Intangibles

Current Liabilities

Bonds Payable

Premium on 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

Dividend Income

Gain on Sale of Equipment

Dividends Declared – P Co.

Dividends Declared – S Co.

Consolidated Net Income

NCI

Controlling Interest

Total NCI

Ret. Earn. Contr. Int. 12-31

For the worksheet solution, please refer to Answer 4-4.

Answer 4-4

Trial Balance Eliminations and

Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Inventory, December 31 100,000 80,000

(EI) 8,000
Other Current Assets 253,000 450,000

(IA) 20,000
Investment in Sub. Company 560,000
(CV) 48,000 (EL) 480,000

(D) 128,000
Other Long-Term Investments 50,000 30,000

Land 140,000 70,000 (D) 10,000

Buildings and Equipment 315,000 400,000

(F1) 20,000
Accumulated Depreciation (208,000) (110,000) (F2) 4,000

Goodwill

(D) 150,000

Other Intangibles 60,000

Current Liabilities (150,000) (100,000) (IA) 20,000

Bonds Payable (100,000)

Premium on Bonds Payable (5,000)

Other Long-Term Liabilities (200,000) (150,000)

Common Stock – P Co. (200,000)

Other Paid in Capital – P Co. (100,000)

Retained Earnings – P Co. (421,000)
(BI) 3,200 (CV) 48,000

Common Stock – S Co.
(100,000) (EL) 80,000

Other Paid in Capital – S Co.
(200,000) (EL) 160,000

Retained Earnings – S Co.
(300,000) (EL) 240,000 (D) 32,000

(BI) 800

Net Sales (600,000) (380,000) (IS) 100,000

Cost of Goods Sold 350,000 180,000 (EI) 8,000 (BI) 4,000

(IS) 100,000
Operating Expenses 140,000 100,000

(F2) 4,000

Dividend Income (24,000)
(CY2) 24,000

Gain on Sale of Equipment (20,000)
(F1) 20,000

Dividends Declared – P Co. 60,000

Dividends Declared – S Co.
30,000

(CY2) 24,000

Consolidated Net Income

NCI

Controlling Interest

Total NCI

Ret. Earn. Contr. Int. 12-31

0 0
868,000
868,000

Consol.
Control. Consol.

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

172,000
Other Current Assets

683,000
Investment in Sub. Company

0

Other Long-Term Investments

80,000
Land

220,000
Buildings and Equipment

695,000
Accumulated Depreciation

(314,000)

Goodwill

150,000
Other Intangibles

60,000
Current Liabilities

(230,000)
Bonds Payable

(100,000)
Premium on Bonds Payable

(5,000)
Other Long-Term Liabilities

(350,000)
Common Stock – P Co.

(200,000)
Other Paid in Capital – P Co.

(100,000)
Retained Earnings – P Co.

(465,800)

Common Stock – S Co.
(20,000)

Other Paid in Capital – S Co.
(40,000)

Retained Earnings – S Co.
(91,200)

Net Sales (880,000)

Cost of Goods Sold 434,000

Operating Expenses 236,000

Dividend Income 0

Gain on Sale of Equipment 0

Dividends Declared – P Co.

60,000

Dividends Declared – S Co.
6,000

Consolidated Net Income (210,000)

NCI 19,200 (19,200)

Controlling Interest 190,800
(190,800)

Total NCI
164,400
(164,400)
Ret. Earn. Contr. Int. 12-31

596,600 (596,600)

0 0 0 0

Eliminations and Adjustments:
Determination and Distribution of Excess Schedule:

Implied Fair Value Parent Price
80% NCI Value
20%
Fair value of subsidiary $700,000 $560,000 $140,000
Less book value of interest acquired 540,000 432,000 108,000
Excess of book value over fair value $160,000 $128,000 $ 32.000

Adjustment of identifiable accounts:

Land $ 10,000

Goodwill 150,000

Patent $160,000

(CV) Convert to the simple equity method as of January 1, 2017 . (80% of $60,000 increase in sub's retained earnings from January 1, 2016 to January 1, 2017 .)

(CY2) Eliminate the current-year dividend income against dividends declared by Subsidiary.

(EL) Eliminate 80% of the Subsidiary Company equity balances at the beginning of the year against the investment account.

(D) Distribute the $160,000 excess of cost over book value to land ($10,000) and to goodwill; allocate to Parent and Sub $128,000 and $32,000 respectively.

(BI) Eliminate the $4,000 ($10,000 x 40%)of gross profit in the beginning inventory; allocate to Parent and Sub 80/20

(IS) Eliminate the entire intercompany sales of $100,000 .

(EI) Eliminate the $8,000 ($20,000 x 40%) of gross profit in the ending inventory.

(IA) Eliminate the $20,000 intercompany accounts receivable and payable.

(F1) Eliminate the $20,000 gain on sale of equipment ($40,000 - $20,000 book value).

(F2) Eliminate the $4,000 of excess depreciation for 2017 on the transferred equipment ($20,000 gain deferred over 5 years).

Calculation of internally generated net income:

Parent Subsidiary
Sales $600,000 $380,000
Gain on sale of equipment 20,000 -
Total income 620,000 380,000
Less:

Cost of goods sold 350,000 180,000
Operating expenses 140,000 100,000
Total expenses 490,000 280,000
Net income $130,000 $100,000

Subsidiary Company Income Distribution Schedule

Deferred profit in ending inventory 8,000 Internally generated net income 100,000

Realized profit in beginning inventory 4,000

Adjusted income 96,000

NCI Share 20%

NCI 19,200

Parent Company Income Distribution Schedule

Deferred gain on sale 20,000 Internally generated net income 130,000

Recognize 1/5 of gain 4,000

80% × Sub's adjusted income 76,800

Controlling interest 190,800