Question

On January 1, 2018, Sledge had common stock of $320,000 and retained earnings of $460,000. During that year, Sledge reported sales of $330,000, cost of goods sold of $170,000, and operating expenses of $60,000. On January 1, 2016, Percy, Inc., acquired 80 percent of Sledge's outstanding voting stock. At that date, $80,000 of the acquisition-date fair value was assigned to unrecorded contracts (with a 20-year life) and $40,000 to an undervalued building (with a 10-year remaining life). In 2017, Sledge sold inventory costing $17,500 to Percy for $35,000. Of this merchandise, Percy continued to hold $9,000 at year-end. During 2018, Sledge transferred inventory costing $20,000 to Percy for $40,000. Percy still held half of these items at year-end. On January 1, 2017, Percy sold equipment to Sledge for $22,000. This asset originally cost $36,000 but had a January 1, 2017, book value of $13,000. At the time of transfer, the equipment's remaining life was estimated to be five years. Percy has properly applied the equity method to the investment in Sledge. a. Prepare worksheet entries to consolidate these two companies as of December 31, 2018. b. Compute the net income attributable to the noncontrolling interest for 2018.

Answer 1

Amortization of Excess Fair Value allocated to specified Assets Remaining Useful life in Amortization per year (A/B) Value As on 01/01/2016 (A) Assets years (B) 4,000 Contract 80,000 20 Building 4,000 40,000 10 Total 120,000 8,000 Carrying Value of the specified assets as on 01/01/18 Accumulated Amortization for 2 years i.e. 2016-17 (Amortization x 2 years) (B) Carrying Value as on 01/01/18 (A-B) Value As on 01/01/2016 (A) Assets 8,000 Contract 80,000 72,000 Building 40,000 32,000 8,000 Total 120,000 104,000 Calculation of Deferred Profit on Intercompany inventory Sold (Upstream) Ending Inventory Deferred Profit (E) Profit % Transfer Price Cost Gross Profit A] [B] [D (C/A)x100] (F-Ex D) [C-A-B] 17,500 Year 50% 35,000 40,000 9,000 2017 17,500 4,500 50% 2018 20,000 20,000 20,000 10,000 |*Ending inventory in 2018 (40,000/2) 20,000

Calculation of Gain on Intercompany Sale of Equipment (Downstream) Original Cost (a) 36,000 Book Value of Equipment Sold (b) 13,000 Accumulated Depreciation (a-b) Sale price of Equipment (c) Gain on Sale of Equipment (c-b) Remaining Life in years Excess Amortization per year (9,000 /5) Unamortized Gain (9,000- 1,800) 23,000 22,000 9,000 1,800 7,200 Calculation of Equity Income from Subsidiary Net Income of Sledge in 2018 Sales 330,000 Cost of goods sold Operating expenses (170,000) (60,000) Net Income of Sledge in 2018 100,000 Add: Deferred Intercompany Inventory Profit beginning balance 4,500 Less: Deferred Intercompany Inventory Profit Ending Balance (10,000) (8,000) Less: Excess Amortization Adjusted Net Income of Sledge 86,500 Share of Percy in Net Income of Sledge (86,500 x Add: Confirmed Gain on Equipment sale 80%) 69,200 1,800 Equity Income from Sledge 71,000

Entries Entries Accounts titles and Explanation Retained Earnings, 01/01/18 (Sledge) Debit Credit S.No 1*G 4,500 Cost of goods sold (to remove intra-entity gross profit from beginning account balance) 4,500 Equipment (36,000 22,000) Investment in Seldge Accumulated Depreciation (23,000-1,800) (to adjust the equipment balance to the original cost (22,000) and accordingly adjust the accumulated Depreciation balance) 2TA 14,000 7,200 21,200 Common Stock 3 S 320,000 Retained Earnings 01/01/18 (Sledge) (460,000-4,500) Investment in Sledge (320,000+455,500) x 80% Noncontrolling interest in Sledge (320,000 + 455,500) x 20% (to eliminate the subsidiary's stockholders' equity accounts after adjusting Retained Earnings from Entry "G and to recognize the noncontrolling interest balance as of January 1, 2018.) 455,500 620,400 155,100 4 A 72,000 Contract Buildings Investment in Sledge (104,000 x 80 %) Noncontrolling interest in Sledge (104,000 x 20 %) (to recognize acquisition-date fair value allocations adjusted for 2 years of amortization.) 32,000 83,200 20,800 Equity Income of Sledge Investment in Sledge 5I 71,000 71,000 (to remove the parent's equity method income)

Amortization Expense 6E 4,000 Depreciation expense 4,000 4,000 Contract Building (to recognize 2018 excess amortization.) 4,000 Sales 7 TI 40,000 Cost of goods sold 40,000 |(to eliminate the intra-entity inventory tranfers during 2018) Cost of Goods sold 8 G 10,000 Inventory 10,000 (to remove the intra-entity gross profit from the ending account balances) Accumulated Depreciation Depreciation expenses (to eliminate the excess depreciation on equipment recorded at transfer price.) 9 ED 1,800 1,800 b. Net income Attributable to Non Controlling Interest Net Income of Sledge in 2018 Sales Cost of goods sold Operating expenses Net Income of Sledge in 2018 Add: Deferred Intercompany Inventory Profit beginning balance Less: Deferred Intercompany Inventory Profit Ending Balance Less: Excess Amortization 330,000 (170,000) (60,000) 100,000 4,500 (10,000) (8,000) Adjusted Net Income of Sledge 86,500 Share of Non Controlling Interest in Income of Sledge (86,500 x 20% ) 17,300 LO