On January 1, 2016, Pepper Company purchased 90% of the common stock of Salt Company for $360,000 when Salt had total shareholders' equity as follows:

8% Preferred Stock, $100 par $100,000
Common Stock, $10 par 50,000
Other Paid-in Capital 120,000
Retained Earnings 180,000
Total $450,000

Any excess of cost over book value on this date is attributed to a patent, to be amortized over 10 years. The 8% preferred stock is cumulative, non-participating, and has a liquidating value of par plus dividends in arrears. There were no preferred dividends in arrears on January 1, 2016 . Pepper elected to account for its investment in Salt using the simple equity method.

During 2016, Salt had a net loss of $10,000 and paid no dividends. In 2017, Salt had net income of $100,000 and paid dividends totaling $36,000 .

During 2017, Salt sold merchandise to Pepper for $40,000, of which $20,000 is still held by Pepper on December 31, 2017 . Salt's usual gross profit is 40%.

Required:

Complete the Figure 7-7 worksheet for consolidated financial statements for the year ended December 31, 2017 .

Figure 7-7

Trial Balance Eliminations and

Pepper Salt Adjustments
Account Titles Company Company Debit Credit
Inventory 60,000 40,000

Other Current Assets 154,200 174,000

Invest in Salt Company 408,600

Land 120,000 80,000

Buildings and Equipment 450,000 370,000

Accumulated Depreciation (200,000) (80,000)

Current Liabilities (80,000) (60,000)

Long-Term Liabilities (100,000) (20,000)

Common Stock – P Co. (200,000)

Other Pd-in Capt – P Co. (100,000)

Retained Earnings – P Co. (400,000)

Preferred Stk, 8% – S Co.
(100,000)

RE to Pref Stk – S Co.

Common Stock – S Co.
(50,000)

Other Pd-In Capt – S Co.
(120,000)

Retained Earnings – S Co.
(170,000)

Net Sales (500,000) (450,000)

Cost of Goods Sold 300,000 270,000

Operating Expenses 120,000 80,000

Investment Income (82,800)

Div. Declared – P Co. 50,000

Div. on Pref Stk – S Co
16,000

Div. on Comm Stk – S Co.
20,000

Consolidated Net Income

Allocated to:

NCI-Preferred

NCI-Common

Controlling Interest

Total NCI

Controlling RE 12/31

0 0

Consol.
Control. Consol.

Income
Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory

Other Current Assets

Invest in Salt Company

Land

Buildings and Equipment

Accumulated Depreciation

Current Liabilities

Long-Term Liabilities

Common Stock – P Co.

Other Pd-in Capt – P Co.

Retained Earnings – P Co.

Preferred Stk, 8% – S Co.

RE to Pref Stk – S Co.

Common Stock – S Co.

Other Pd-In Capt – S Co.

Retained Earnings – S Co.

Net Sales

Cost of Goods Sold

Operating Expenses

Investment Income

Div. Declared – P Co.

Div. on Pref Stk – S Co

Div. on Comm Stk – S Co.

Consolidated Net Income

Allocated to:

NCI-Preferred

NCI-Common

Controlling Interest

Total NCI

Controlling RE 12/31

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

Answer 7-7

Trial Balance Eliminations and

Pepper Salt Adjustments
Account Titles Company Company Debit Credit
Inventory 60,000 40,000

EI 8,000
Other Current Assets 154,200 174,000

Invest in Salt Company 408,600

CY 64,800

EL 298,800

D 45,000

Land 120,000 80,000

Buildings and Equipment 450,000 370,000

Accumulated Depreciation (200,000) (80,000)

Patent

D 50,000 A 10,000
Current Liabilities (80,000) (60,000)

Long-Term Liabilities (100,000) (20,000)

Common Stock – P Co. (200,000)

Other Pd-in Capt – P Co. (100,000)

Retained Earnings – P Co. (400,000)
A 4,500

Preferred Stk, 8% – S Co.
(100,000)

RE to Pref Stk – S Co.

PS 8,000
Common Stock – S Co.
(50,000) EL 45,000

Other Pd-In Capt – S Co.
(120,000) EL 108,000

Retained Earnings – S Co.
(170,000) PS 8,000 D 5,000

EL 145,800

A 500

Net Sales (500,000) (450,000) IS 40,000

Cost of Goods Sold 300,000 270,000 EI 8,000 IS 40,000
Operating Expenses 120,000 80,000 A 5,000

Investment Income (82,800)
CY 82,800

Div. Declared – P Co. 50,000

Div. on Pref Stk – S Co
16,000

Div. on Comm Stk – S Co.
20,000

CY 18,000

Consolidated Net Income

Allocated to:

NCI-Preferred

NCI-Common

Controlling Interest

Total NCI

Controlling RE 12/31

0 0
497,600
497,600

Consol.
Control. Consol.

Income
Retained Balance
Account Titles Statement NCI Earnings Sheet
Inventory

92,000
Other Current Assets

328,200
Invest in Salt Company

0

Land

200,000
Buildings and Equipment

820,000
Accumulated Depreciation

(280,000)
Patent

40,000
Current Liabilities

(140,000)
Long-Term Liabilities

(120,000)
Common Stock – P Co.

(200,000)
Other Pd-in Capt – P Co.

(100,000)
Retained Earnings – P Co.

(395,500)

Preferred Stk, 8% – S Co.
(100,000)

RE to Pref Stk – S Co.
(8,000)

Common Stock – S Co.
(5,000)

Other Pd-In Capt – S Co.
(12,000)

Retained Earnings – S Co.
(20,700)

Net Sales (910,000)

Cost of Goods Sold 538,000

Operating Expenses 205,000

Investment Income 0

Div. Declared – P Co.

50,000

Div. on Pref Stk – S Co
16,000

Div. on Comm Stk – S Co.
2,000

Consolidated Net Income (167,000)

Allocated to:

NCI-Preferred 8,000 (8,000)

NCI-Common 7,900 (7,900)

Controlling Interest 151,100
(151,100)

Total NCI
(143,600)
(143,600)
Controlling RE 12/31

(496,600) (496,600)

0

Eliminations and Adjustments:

PS Allocate the 8,000 ($100,000 x 8%) of preferred dividends in arrears on January 1, 2017 to the preferred equity.

CY Eliminate the current-year entries made in the investment account and in the investment income account.

EL Eliminate 90% of Salt's common equity balances at the beginning of the year against the investment account.

D Allocate the $50,000 excess of cost over book value to the patent. [$360,000 / 90% = $400,000 - ($50,000 + $120,000 + $180,000)]

A Amortize the patent over 10 years, with $5,000 for 2016 charged to retained earnings, and $5,000 for 2017 to operating expenses. ($50,000 / 10)

IS Eliminate the entire intercompany sales of $40,000 .

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

Subsidiary Company Income Distribution Schedule
Pref stk cumulative claim, NCI 10% 8,000 Internally generated net income 100,000
Deferred profit in ending inventory 8,000 Common stock income 92,000
1 year amortization on patent 5,000

Adjusted common stock income 79,000

NCI Share 10%

NCI 7,900

Parent Company Income Distribution Schedule

Internally generated net income 80,000

90% × Sub's adj common stk inc 71,100

Controlling interest 151,100