On January 1, 2016, Parent Company acquired 90% of the common stock of Subsidiary Company for $360,000 . On this date, Subsidiary had common stock, other paid in capital, and retained earnings of $50,000, $100,000, and $200,000 respectively

Any excess of cost over book value is due to goodwill. Parent uses the simple equity method to account for its investment in subsidiary. On January 1, 2017, Parent purchased equipment for $204,110 and immediately leased the equipment to Subsidiary on a 4-year lease. The minimum lease payments of $60,000 are to be made annually on January 1, beginning immediately, for a total of 4 payments. The implicit interest rate is 12%. The lease provides for an automatic transfer of title at the end of 4 years. The estimated useful life of the equipment is 6 years. The lease has been capitalized by both companies. A lease amortization schedule, applicable to either company, is presented below: Date Payment Interest on previous balance Gross Receivable Unearned Interest Carrying Value 1/1/17 240,000 (35,890) 204,110 1/1/17 60,000 180,000 (35,890) 144,110 1/1/16 60,000 17,293 120,000 (18,597) 101,403 1/1/19 60,000 12,168 60,000 (6,429) 53,571 1/1/21 60,000 6,429 0 0 0 Required: Prepare the eliminations and adjustments required by the intercompany lease on the Figure 5-11 partial worksheet as of December 31, 2016 . Key and explain all eliminations and adjustments. Figure 5-11 Trial Balance Eliminations and Parent Sub. Adjustments Account Titles Company Company Debit Credit Min. Lease Payments Rec. 120,000 Unearned Interest Income (6,429) Buildings and Equipment 350,000 300,000 Accumulated Depreciation (120,000) (80,000) Equipment under Cap. Lease 204,110 Acc. Depr. - Eq. Cap. Lease (68,037) Obligation under Cap. Lease (101,403) Interest Payable on Lease (12,168) Interest Income on Lease (12,168) Interest Expense on Lease 12,168 Consol. Control. Consol. Income Retained Balance Account Titles Statement NCI Earnings Sheet Min. Lease Payments Rec. Unearned Interest Income Buildings and Equipment Accumulated Depreciation Equipment under Cap. Lease Acc. Depr. - Eq. Cap. Lease Obligation under Cap. Lease Interest Payable on Lease Interest Income on Lease Interest Expense on Lease

For the partial worksheet solution, please refer to Answer 5-11.

Answer 5-11

Trial Balance Eliminations and

Parent Sub. Adjustments
Account Titles Company Company Debit Credit
Min. Lease Payments Rec. 120,000

(CL2) 120,000
Unearned Interest Income (6,429)
(CL2) 6,429

Buildings and Equipment 350,000 300,000 (CL3) 204,110

Accumulated Depreciation (120,000) (80,000)

(CL4) 68,037
Equipment under Cap. Lease
204,110

(CL3) 204,110
Acc. Depr. - Eq. Cap. Lease
(68,037) (CL4) 68,037

Obligation under Cap. Lease
(101,403) (CL2) 101,403

Interest Payable on Lease
(12,168) (CL2) 12,168

Interest Income on Lease (12,168)
(CL1) 12,168

Interest Expense on Lease
12,168

(CL1) 12,168

Consol.
Control. Consol.

Income
Retained Balance
Account Titles Statement NCI Earnings Sheet
Min. Lease Payments Rec.

0
Unearned Interest Income

0
Buildings and Equipment

854,110
Accumulated Depreciation

(268,037)
Equipment under Cap. Lease

0
Acc. Depr. - Eq. Cap. Lease

0
Obligation under Cap. Lease

0
Interest Payable on Lease

0
Interest Income on Lease 0

Interest Expense on Lease 0

Eliminations and Adjustments:

(CL1) Eliminate the intercompany interest income and expense on the lease obligation (per table).

(CL2) Eliminate the intercompany receivable and payable on the leased asset. The receivable balance is $113,571 ($120,000 minimum lease payment receivable less unearned interest of $6,429).

The payable is also $113,571 ($101,403 lease obligation payable plus $12,168 interest payable).

(CL3) Reclassify the leased equipment as ordinary Building and Equipment.

(CL4) Reclassify the accumulated depreciation on the leased equipment.

Note that consolidated net income is not impacted because equal amounts of interest expense and revenue were eliminated.