Question

Problem 5-35 (LO 5-1, 5-2, 5-3, 5-4, 5-5, 5-6, 5-7) The individual financial statements for Gibson Company and Keller Company for the year ending December 31, 2018, follow. Gibson acquired a 60 percent interest in Keller on January 1, 2017, in exchange for various considerations totaling $420,000. At the acquisition date, the fair value of the noncontrolling interest was $280,000 and Keller's book value was $550,000. Keller had developed internally a customer list that was not recorded on its books but had an acquisition-date fair value of $150,000. This intangible asset is being amortized over 20 years Gibson sold Keller land with a book value of $70,000 on January 2, 2017, for $140,000. Keller still holds this land at the end of the current year. Keller regularly transfers inventory to Gibson. In 2017, it shipped inventory costing $130,000 to Gibson at a price of $200,000. During 2018, intra-entity shipments totaled $250,000, although the original cost to Keller was only $150,000. In each of these years, 20 percent of the merchandise was not resold to outside parties until the period following the transfer. Gibson owes Keller $70,000 at the S end of 2018. Keller Gibson Company (550,000) 350,000 50,000 0 Company (850,000) 550,000 150,000 Sales S Cost of goods sold Operating expenses Equity in earnings of Keller (90,000) Net income (240,000) S (150,000) Retained earnings, 1/1/18 Net income (above) $(1,166,000) (240,000) S (645,000) (150,000) 50,000 Dividends declared 140,000 (745,000) $(1,266,000) Retained earnings, 12/31/18 Cash 174,000 366,000 440,000 813,000 160,000 501,000 S 60,000 460,000 370,000 Accounts receivable Inventory Investment in Keller Land 0 440,000 350,000 Buildings and equipment (net) $ 1,680,000 2,454,000 Total assets Liabilities (548,000) (640,000) S (475,000) Common stock (370,000) (90,000) (745,000) Additional paid-in capital Retained earnings, 12/31/18 0 (1,266,000) $(2,454,000) $(1,680,000) Total liabilities and equities (Note: Parentheses indicate a credit balance.) Prepare a worksheet to consolidate the separate 2018 financial statements for Gibson and Keller. b. How would the consolidation entries in requirement (a) have differed if Gibson had sold a building with a $85,000 book value (cost of $190,000) to Keller for $150,000 instead of land, as the problem reports? Assume that the building had a 10-year remaining life at the date of transfer a. Required B Required A Prepare a worksheet to consolidate the separate 2018 financial statements for Gibson and Keller. (Do not round intermediate calculations. For accounts where multiple consolidation entries are required, combine all debit entries into one amount and enter this amount in the debit column of the worksheet. Similarly, combine all credit entries into one amount and enter this amount in the credit column of the worksheet. Amounts in the Debit and Credit columns should be entered as positive. Negative amounts for the Noncontrolling Interest and Consolidated Totals columns should be entered with a minus sign.) Show less GIBSON AND KELLER Consolidation Works heet For the Year Ending December 31, 2018 Consolidation Entries Noncontrolling Consolidated Interest Gibson Accounts Keller Debit Credit Totals (850,000) (550,000) 550,000 Sales Cost of goods sold 350,000 Operating expenses 150,000 50,000 Equity in earnings of Keller (90,000) 0 (240,000) S (150,000) Separate company net income Consalidated net income To noncontrolling interest To Gibson Company (1,166,000) Retained earnings, 1/1-Gibson (645,000) Retained earnings, 1/1-Keller (240,000) Net income (150,000) Dividends declared 140,000 50,000 $ (1,266,000) S (745,000) Retained earnings, 12/31 S S Cash 174,000 60,000 460,000 Accounts receivable 366,000 440,000 Inventory 370,000 Investment in Keller 813,000 160,000 440,000 Land Buildings and equipment (net) 501,000 350,000 Customer list 1,680,000 2,454,000 Total assets S (548,000) S Liabilities (475,000) (640,000) (370,000) Common stock Additional paid-in capital (90,000) (1,266,000) Retained earnings, 12/31 (745,000) NCI in Keller, 1/1 NCI in Keller, 12/31 (2,454,000) (1,680,000) Total liabilities and equity Required B Required A How would the consolidation entries in requirement (a) have differed if Gibson had sold a building with a $85,000 book value (cost of $190,000) to Keller for $150,000 instead of land, as the problem reports? Assume that the building had a 10-year remaining life at the date of transfer. (Do not round intermediate calculations. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) view transaction list Consolidation Worksheet Entries 1 2 Prepare Entry TA to defer the intra-entity gain as of the beginning of the year Note: Enter debits before credits. Transaction Accounts Debit Credit Record entry Clear entry view consolidation entries

Answer 1

Parent Uses the Partial Equity Method as we can see that the Equity income from Keller is 60% of the Net Income of Keller Net Income of Keller Equity in earnings of Keller (150,000 x 60%) 150,000 90,000 Consideration transferred 420,000 Fair Value of Non Controlling Interest 280,000 Total Fair value of Keller's 700,000 Book Value of Keller's (550,000) Fair Value in Excess of Book Value 150,000 Excess Fair Value Assigned to: Customer list Life Amortization per year (150,000/20) Parent Share's in amortization (7,500 x 60 %) NCI in amortization (7,500 x 40%) 150,000 20 year 7,500 4,500 3,000 Unamortized Value of Customer list as on 1/1/2018 Customer list as on 1/1/2017 150,000 Less: Amortization during the year 2017 (7,500) Unamortized Value of Customer list as on 1/1/2018 142,500

Profit on Inter Company sale of Land (downstream) Year 2017 Book Value of Land Sold (a) Sold price to Keller (b) Gain to Gibson( b-a) 70,000 140,000 70,000 Profit on Inter Company sale of Inventory (Upstream) Gibson Share Non Controlling Interest Share 40% on Deferred Profit (d x 40% ) Deferred Profit at Profit C-(b-a) year end d(cx 20%) 60% on Deferred Profit (d x 60%) Transfer Price (a) Cost (b) Year 2017 200,000 130,000 70,000 14,000 8,400 5,600 Year 2018 250,000 150,000 100,000 20,000 12,000 8,000 450,000 280,000 170,000 34,000 20,400 13.600

Consolidation Entries Account titles and explanation Retained Earnings, 1/1/18 (Gibson) Debit Credit Event TL] 70,000 Land 70,000 (to remove unrealized gain on intra-entity downstream transfer of land on 2017) Retained Earnings, 1/1/18 (Keller) Cost of goods sold move unrealized gain on intra-entity upstream transfer of inventory on 2017) *G] 14,000 14,000 Retained Earnings, 1/1/18 (Gibson) c] 12,900 Investment in Keller 12,900 /to recognized the share in amortization expenses in 2017 i.e 4,500 and Share in unrealized gain on intra-entity transfer of inventory on 2017 i.e. 8,400) Common stock (Keller) [s] 370,000 Additional Paid in Capital (Keller) 90,000 Retained Earnings, 1/1/18 (Keller) (645,000-14,200) Investment in Keller (370,000+90,000+631,000) x 60 % Non Controlling in Keller, 1/1/18 (370,000+90,000 +631,000) x 40 % (to remove stockholders' equity accounts of Kellar and recognize beginning balance of Non controlling Interest at beginning. And Retained Earnings Beginning balance was 631,000 654,600 436,400 adjusted with the Entry G) Equity in earnings in Keller 90,000 Investment in Keller 90,000 /to eliminate intra -entity income accrual] [A] Customer List 142,500 Investment in Keller (60 %) Non Controlling Interest in Keller, 1/1/18 (40 %) (to recognized the unamortized value of customer list as on 1/1/2018) 85,500 57,000

[D] Investment in Kellar (50,000 x 60%) 30,000 Dividend Declared 30,000 [to eliminate intra-entity 60 % dividend transfer) Amortization expense [E] 7,500 Customer list 7,500 (to record amortization expense during the year) [P] Liabilities 70,000 Accounts receivable 70,000 to remove the intra entity debt] [TI] Sales 250,000 Cost of goods sold /to eliminate the current year intra entity inventory transfer] 250,000 Cost of goods sold G 20,000 Inventory to eliminate the defer 2018 unrealized inventory gross profit] 20,000 Calculation of Non Controlling Interest share in Keller's Income Net Income of Keller 150,000 Add: Deferred unrealized gain on Intra company inventory profit on 2017 Less: Deferred unrealized gain on intra company inventory profit on 2018 Less: Amortization expenses in 2018 Adjusted Net Income of Keller in 2018 NCI share in Keller Income (136,500 x 40 %) 14,000 (20,000) (7,500) 136,500 54,600

GIBSON AND KELLER Consolidated Worksheet For Year Ending December 31, 2018 Non Consolidated Keller Credit Controlling Totals Gibson Debit Accounts (1,150,000) Sales (850,000) (550,000) 250,000 Cost of goods sold 350,000 656,000 550,000 20,000 264,000 Operating Expense 50,000 150,000 7,500 207,500 (90,000) 90,000 Equity in earnings of Kellar (150,000) Separate Net Income (240,000) Consolidated Net Income (286,500) Net Income attributable to NCI (54,600) 54,600 To Gibson Company (231,900) Retained Earnings 1/1/-Gibson (1,166,000) (1,083,100) 82,900 Retained Earnings 1/1/ -Keller Net Income (above) (645,000) 645,000 (150,000) (240,000) (231,900) Dividends Declared 140,000 50,000 30,000 20,000 140,000 Retained Earnings 12/31 (1,266,000) (745,000) (1,175,000) Cash 60,000 174,000 234,000 Accounts receivable 366,000 460,000 70,000 756,000 790,000 Inventory 440,000 370,000 20,000 Investment in Keller 813,000 30,000 843,000 Land 160,000 440,000 70,000 530,000 Buildings and equipment (net) 350,000 501,000 851,000 142,500 Customer List 7,500 135,000 Total Assets 1,680,000 3,296,000 2,454,000

(548,000) (640,000) (953,000) Liabilities (475,000) (370,000) 70,000 Common stock (640,000) 370,000 Additional Paid in capital (90,000) 90,000 Retained Earnings 12/31 NCI in Keller, 1/1 (1,266,000) (745,000) (1,175,000) 493,400 (493,400) NCI in Keller, 12/31 (528,000) (528,000) Total Liabilites and equity (2,454,000) (1,680,000) (3,296,000) 1,797,900 1,797,900 Working Adjustment Total Entries Debit Credit Cost of goods sold Entry (G) 20,000 Entry (*G) Entry (TI) 14,000 250,000 Total Adjustment 20,000 264,000 Retained Earnings 1/1/18- Gibbson Debit Credit Entry (TL) Entry (C) 70,000 12,900 Total Adjustment 82,900

Retained Earnings 1/1/-Keller Debit Credit Entry (*G) Entry (S) 14,000 631,000 Total Adjustment 645,000 Investment in Keller Debit Credit Entry [D] Entry [C] 30,000 12,900 Entry [S] Entry [I] Entry [A 654,600 90,000 85,500 Total Adjustment 30,000 843,000 NCI in Keller, 1/1 Debit Credit Entry [S] 436,400 Entry [A] 57,000 Total Adjustment 493,400

Cost of Building 190,000 Less: Book value of Depreciation (85,000) Accumulated Depreciation 105,000 Book Value of Building Transfer Transfer price of Building Gain of Transfer (150,000 85,000) Life remaining Excess Depreciation per year (65,000/10) 85,000 150,000 65,000 10 years 6,500 Unamortized Excess Building at the end of year 2017 (65,000 6,500) 58,500 Accounts titles and Explanation Transactions Debit Credit Entry *TA 1) Retained Earnigns, 1/1/2018 (Gibson) Building (190,000-150,000) Accumulated Depreciation (105,000 6,500) (to eliminate the unrealized gain) 58,500 40,000 $ 98,500 ED Accumulated Depreciation 2) 6,500 Operating Expense 6,500 (to remove the excess depreciation charged during the year)