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P7-32 Consolidation Worksheet in Year of Intercompany Transfer

Note: In converting this problem from the modified to the fully adjusted equity method, we
failed to deduct the $8,000 deferred gain from the land sale in 2005 from the beginning
balance of the investment and retained earnings accounts. If you complete the problem
based on the numbers given in the trial balance in the text, the investment account will not
be fully eliminated. In order to correct this problem, please reduce the Investment in Lane
Company Stock and Retained Earnings of Prime Company by 8,000. Adjusted balances in
the trial balance:

Investment in Lane Company Stock = 191,600
Retained Earnings = 322,000

a. These calculations are based on the corrected numbers

 Equity Method Entries on Prime Co.'s Books:
 Investment in Lane Co.                             40,000
     Income from Lane Co.                                             40,000
 Record Prime Co.'s 80% share of Lane Co.'s 20X6 income

 Cash                                                4,000
    Investment in Lane Co.                                                  4,000
 Record Prime Co.'s 80% share of Lane Co.'s 20X6 dividend

 Income from Lane Co.                                 14,400
     Investment in Lane Co.                                             14,400
 Record amortization of excess acquisition price

 Income from Lane Co.                                 20,000
     Investment in Lane Co.                                             20,000
 Defer unrealized gain on Equipment

 Investment in Lane Co.                                   2,000
     Income from Lane Co.                                                   2,000
 Reverse the deferred gain

 Book Value Calculations:
                            NCI       +     Prime Co.      =   Common         +     Retained
                           20%                 80%               Stock              Earnings
 Original book value       39,000             156,000           100,000                95,000
 + Net Income              10,000              40,000                                  50,000
 - Dividends               (1,000)              (4,000)                                (5,000)
 Ending book value         48,000             192,000             100,000            140,000
Deferred Gain Calculations:
                                               Prime
                                               Co.'s
                         Total         =       share       +    NCI's share
 Downstream Asset          (20,000)            (20,000)
 Extra Depreciation            2,000              2,000                 0
 Total                     (18,000)            (18,000)                 0




P7-32 (continued)

 Basic elimination entry
 Common stock                              100,000                    ← Original amount invested (100%)
 Retained earnings                          95,000                    ← Beginning balance in RE
 Income from Lane Co.                       22,000                    ← Prime’s share of NI - Def. Gain
 NCI in NI of Lane Co.                      10,000                    ← NCI share of Lane Co.'s NI
     Dividends declared                                     5,000     ← 100% of Lane Co.'s dividends
     Investment in Lane Co.                               174,000     ← Prime's share of BV - Def. Gain
     NCI in NA of Lane Co.                                 48,000     ← NCI share of BV of net assets


 Excess Value (Differential) Calculations:
                          NCI
                          20%      + Prime Co. 80%        =     Goodwill
 Beginning balance       10,000              40,000               50,000
 Changes                 (3,600)            (14,400)             (18,000)
 Ending balance           6,400              25,600               32,000



 Amortized excess value reclassification entry:
 Goodwill impairment loss                  18,000
    Income from Lane Co.                                   14,400
    NCI in NI of Lane Co.                                   3,600


 Excess value (differential) reclassification entry:
 Goodwill                                     32,000
    Investment in Lane Co.                                25,600
    NCI in NA of Lane Co.                                  6,400


 Eliminate intercompany accounts:
 Accounts Payable                             7,000
     Cash and Accounts Receivable                             7,000
Eliminate gain on purchase of land
 Investment in Lane Co.                       8,000
 NCI in NI of Lane Co.                        2,000
     Land                                              10,000


                                                            Accumulated
                  Equipment                                  Depreciation
   Lane Co.    70,000                       Actual                      7,000
                5,000                                       2,000     25,000
  Prime Co.    75,000                       "As If"                   30,000




 Eliminate the gain on Equipment and correct asset's basis:
 Gain on sale                             20,000
 Equipment                                 5,000
     Accumulated Depreciation                          25,000

 Accumulated Depreciation                     2,000
    Depreciation Expense                                 2,000


P7-32 (continued)

                          Investment in                               Income from
                             Lane Co.                                   Lane Co.
  Beginning Balance     188,000
    80% Net Income      40,000                                                  40,000   80% Net Income
                                  4,000         80% Dividends
                                  14,400      Excess Val. Amort.    14,400
    Realize Def. Gain   2,000     20,000     Defer Equipment Gain   20,000      2,000    Realize Def. Gain
     Ending Balance     191,600                                                 7,600    Ending Balance
                                  174,000           Basic           22,000
    Land Adjustment        8,000 25,600         Excess Reclass.                 14,400
                               0                                                     0
b. This worksheet is based on the corrected numbers:

                                                            Elimination Entries
                                    Prime Co.    Lane Co.    DR           CR      Consolidated
   Income Statement
   Sales                              240,000    130,000                              370,000
   Gain on Sale of Equipment           20,000               20,000                          0
   Less: COGS                        (140,000)   (60,000)                            (200,000)
   Less: Depr.&Amort. Expense         (25,000)   (15,000)                 2,000       (38,000)
   Less: Other Expenses               (15,000)    (5,000)                             (20,000)
   Less: Goodwill Impairment Loss                           18,000                    (18,000)
   Income from Lane Co.                7,600                22,000      14,400              0
   Consolidated Net Income            87,600      50,000    60,000      16,400         94,000
   NCI in Net Income                                        10,000       3,600         (6,400)
   Controlling Interest in NI         87,600      50,000    70,000      20,000         87,600

   Statement of Retained Earnings
   Beginning Balance                 322,000      95,000    95,000                    322,000
   Net Income                         87,600      50,000    70,000      20,000         87,600
   Less: Dividends Declared          (30,000)     (5,000)                5,000        (30,000)
                                                            165,00
   Ending Balance                    379,600     140,000        0       25,000        379,600

   Balance Sheet
   Cash and Accounts Receivable      113,000      35,000                  7,000       141,000
   Inventory                         260,000      90,000                              350,000
   Land                               80,000      80,000                10,000        150,000
   Buildings & Equipment             500,000     150,000     5,000                    655,000
   Less: Accumulated
   Depreciation                      (205,000)   (45,000)    2,000      25,000       (273,000)
                                                                        174,00
   Investment in Lane Co.            191,600                 8,000           0              0
                                                                        25,600
   Goodwill                                                 32,000                     32,000
                                                                         241,60
   Total Assets                      939,600     310,000    47,000           0       1,055,000

   Accounts Payable                   60,000      20,000     7,000                     73,000
   Bonds Payable                     200,000      50,000                              250,000
                                                            100,00
   Common Stock                      300,000     100,000        0                     300,000
                                                            165,00
   Retained Earnings                 379,600     140,000        0       25,000        379,600
   NCI in NA of Lane Co.                                    2,000       48,000         52,400
                                                                         6,400
                                                            274,00
   Total Liabilities & Equity        939,600     310,000        0       79,400       1,055,000
P7-32 (continued)

These financial statements are based on the corrected numbers:

c.                              Prime Company and Subsidiary
                                 Consolidated Balance Sheet
                                     December 31, 20X6

Cash and Receivables                                                         $   141,000
Inventory                                                                        350,000
Land                                                                             150,000
Buildings and Equipment                                          $655,000
Less: Accumulated Depreciation                                   (273,000)      382,000
Goodwill                                                                         32,000
Total Assets                                                                 $1,055,000

Accounts Payable                                                             $    73,000
Bonds Payable                                                                    250,000
Stockholders’ Equity:
  Controlling Interest:
    Common Stock                                                 $300,000
    Retained Earnings                                             379,600
  Total Controlling Interest                                     $679,600
  Total Noncontrolling Interest                                    52,400
Total Stockholders’ Equity                                                      732,000
Total Liabilities and Stockholders' Equity                                   $1,055,000
Prime Company and Subsidiary
                            Consolidated Income Statement
                            Year Ended December 31, 20X6

Sales                                                                  $ 370,000
Cost of Goods Sold                                          $200,000
Depreciation and Amortization Expense                         38,000
Goodwill Impairment Loss                                      18,000
Other Expenses                                                20,000
Total Expenses                                                          (276,000)
Consolidated Net Income                                                $  94,000
Income to Noncontrolling Interest                                         (6,400)
Income to Controlling Interest                                         $ 87,600



                          Prime Company and Subsidiary
                      Consolidated Retained Earnings Statement
                          Year Ended December 31, 20X6

Retained Earnings, January 1, 20X6                                     $ 322,000
Income to Controlling Interest, 20X6                                      87,600
                                                                       $ 409,600
Dividends Declared, 20X6                                                 (30,000)
Retained Earnings, December 31, 20X6                                   $ 379,600
P7-32 (continued)

b. This worksheet is based on the uncorrected numbers:

                                    Prime        Lane      Elimination Entries
                                     Co.          Co.       DR           CR      Consolidated
   Income Statement
   Sales                            240,000     130,000                              370,000
   Gain on Sale of Equipment          20,000               20,000                          0
                                    (140,000
   Less: COGS                               )   (60,000)                            (200,000)
   Less: Depr.&Amort. Expense        (25,000)   (15,000)                 2,000       (38,000)
   Less: Other Expenses              (15,000)    (5,000)                             (20,000)
   Less: Goodwill Impairment Loss                          18,000                    (18,000)
   Income from Lane Co.               7,600                22,000      14,400              0
   Consolidated Net Income           87,600     50,000     60,000      16,400         94,000
   NCI in Net Income                                       10,000       3,600         (6,400)
   Controlling Interest in NI        87,600     50,000     70,000      20,000         87,600

   Statement of Retained Earnings
   Beginning Balance                330,000     95,000     95,000                    330,000
   Net Income                        87,600     50,000     70,000      20,000         87,600
   Less: Dividends Declared         (30,000)    (5,000)                 5,000        (30,000)
                                                           165,00
   Ending Balance                   387,600     140,000        0       25,000        387,600

   Balance Sheet
   Cash and Accounts Receivable     113,000     35,000                   7,000       141,000
   Inventory                        260,000     90,000                               350,000
   Land                               80,000    80,000                 10,000        150,000
   Buildings & Equipment            500,000     150,000     5,000                    655,000
   Less: Accumulated                (205,000
   Depreciation                             )   (45,000)    2,000      25,000       (273,000)
                                                                       174,00
   Investment in Lane Co.           199,600                 8,000           0          8,000
                                                                       25,600
   Goodwill                                                32,000                     32,000
                                                                        241,60
   Total Assets                     947,600     310,000    47,000           0       1,063,000

   Accounts Payable                  60,000     20,000      7,000                     73,000
   Bonds Payable                    200,000     50,000                               250,000
                                                           100,00
   Common Stock                     300,000     100,000        0                     300,000
                                                           165,00
   Retained Earnings                387,600     140,000        0       25,000        387,600
   NCI in NA of Lane Co.                                   2,000       48,000         52,400
                                                                        6,400
                                                           274,00
   Total Liabilities & Equity       947,600     310,000        0       79,400       1,063,000
P7-32 (continued)

These financial statements are based on the uncorrected numbers:

c.                              Prime Company and Subsidiary
                                 Consolidated Balance Sheet
                                     December 31, 20X6

Cash and Receivables                                                       $   141,000
Inventory                                                                      350,000
Land                                                                           150,000
Buildings and Equipment                                        $655,000
Less: Accumulated Depreciation                                 (273,000)      382,000
Investment in Lane Co.                                                          8,000
Goodwill                                                                       32,000
Total Assets                                                               $1,063,000

Accounts Payable                                                           $    73,000
Bonds Payable                                                                  250,000
Stockholders’ Equity:
  Controlling Interest:
    Common Stock                                               $300,000
    Retained Earnings                                           387,600
  Total Controlling Interest                                   $687,600
  Total Noncontrolling Interest                                  52,400
Total Stockholders’ Equity                                                    740,000
Total Liabilities and Stockholders' Equity                                 $1,063,000
Prime Company and Subsidiary
                            Consolidated Income Statement
                            Year Ended December 31, 20X6

Sales                                                                  $ 370,000
Cost of Goods Sold                                          $200,000
Depreciation and Amortization Expense                         38,000
Goodwill Impairment Loss                                      18,000
Other Expenses                                                20,000
Total Expenses                                                          (276,000)
Consolidated Net Income                                                $  94,000
Income to Noncontrolling Interest                                         (6,400)
Income to Controlling Interest                                         $ 87,600

                          Prime Company and Subsidiary
                      Consolidated Retained Earnings Statement
                          Year Ended December 31, 20X6

Retained Earnings, January 1, 20X6                                     $ 330,000
Income to Controlling Interest, 20X6                                      87,600
                                                                       $ 417,600
Dividends Declared, 20X6                                                 (30,000)
Retained Earnings, December 31, 20X6                                   $ 387,600

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P7 32

  • 1. P7-32 Consolidation Worksheet in Year of Intercompany Transfer Note: In converting this problem from the modified to the fully adjusted equity method, we failed to deduct the $8,000 deferred gain from the land sale in 2005 from the beginning balance of the investment and retained earnings accounts. If you complete the problem based on the numbers given in the trial balance in the text, the investment account will not be fully eliminated. In order to correct this problem, please reduce the Investment in Lane Company Stock and Retained Earnings of Prime Company by 8,000. Adjusted balances in the trial balance: Investment in Lane Company Stock = 191,600 Retained Earnings = 322,000 a. These calculations are based on the corrected numbers Equity Method Entries on Prime Co.'s Books: Investment in Lane Co. 40,000 Income from Lane Co. 40,000 Record Prime Co.'s 80% share of Lane Co.'s 20X6 income Cash 4,000 Investment in Lane Co. 4,000 Record Prime Co.'s 80% share of Lane Co.'s 20X6 dividend Income from Lane Co. 14,400 Investment in Lane Co. 14,400 Record amortization of excess acquisition price Income from Lane Co. 20,000 Investment in Lane Co. 20,000 Defer unrealized gain on Equipment Investment in Lane Co. 2,000 Income from Lane Co. 2,000 Reverse the deferred gain Book Value Calculations: NCI + Prime Co. = Common + Retained 20% 80% Stock Earnings Original book value 39,000 156,000 100,000 95,000 + Net Income 10,000 40,000 50,000 - Dividends (1,000) (4,000) (5,000) Ending book value 48,000 192,000 100,000 140,000
  • 2. Deferred Gain Calculations: Prime Co.'s Total = share + NCI's share Downstream Asset (20,000) (20,000) Extra Depreciation 2,000 2,000 0 Total (18,000) (18,000) 0 P7-32 (continued) Basic elimination entry Common stock 100,000 ← Original amount invested (100%) Retained earnings 95,000 ← Beginning balance in RE Income from Lane Co. 22,000 ← Prime’s share of NI - Def. Gain NCI in NI of Lane Co. 10,000 ← NCI share of Lane Co.'s NI Dividends declared 5,000 ← 100% of Lane Co.'s dividends Investment in Lane Co. 174,000 ← Prime's share of BV - Def. Gain NCI in NA of Lane Co. 48,000 ← NCI share of BV of net assets Excess Value (Differential) Calculations: NCI 20% + Prime Co. 80% = Goodwill Beginning balance 10,000 40,000 50,000 Changes (3,600) (14,400) (18,000) Ending balance 6,400 25,600 32,000 Amortized excess value reclassification entry: Goodwill impairment loss 18,000 Income from Lane Co. 14,400 NCI in NI of Lane Co. 3,600 Excess value (differential) reclassification entry: Goodwill 32,000 Investment in Lane Co. 25,600 NCI in NA of Lane Co. 6,400 Eliminate intercompany accounts: Accounts Payable 7,000 Cash and Accounts Receivable 7,000
  • 3. Eliminate gain on purchase of land Investment in Lane Co. 8,000 NCI in NI of Lane Co. 2,000 Land 10,000 Accumulated Equipment Depreciation Lane Co. 70,000 Actual 7,000 5,000 2,000 25,000 Prime Co. 75,000 "As If" 30,000 Eliminate the gain on Equipment and correct asset's basis: Gain on sale 20,000 Equipment 5,000 Accumulated Depreciation 25,000 Accumulated Depreciation 2,000 Depreciation Expense 2,000 P7-32 (continued) Investment in Income from Lane Co. Lane Co. Beginning Balance 188,000 80% Net Income 40,000 40,000 80% Net Income 4,000 80% Dividends 14,400 Excess Val. Amort. 14,400 Realize Def. Gain 2,000 20,000 Defer Equipment Gain 20,000 2,000 Realize Def. Gain Ending Balance 191,600 7,600 Ending Balance 174,000 Basic 22,000 Land Adjustment 8,000 25,600 Excess Reclass. 14,400 0 0
  • 4. b. This worksheet is based on the corrected numbers: Elimination Entries Prime Co. Lane Co. DR CR Consolidated Income Statement Sales 240,000 130,000 370,000 Gain on Sale of Equipment 20,000 20,000 0 Less: COGS (140,000) (60,000) (200,000) Less: Depr.&Amort. Expense (25,000) (15,000) 2,000 (38,000) Less: Other Expenses (15,000) (5,000) (20,000) Less: Goodwill Impairment Loss 18,000 (18,000) Income from Lane Co. 7,600 22,000 14,400 0 Consolidated Net Income 87,600 50,000 60,000 16,400 94,000 NCI in Net Income 10,000 3,600 (6,400) Controlling Interest in NI 87,600 50,000 70,000 20,000 87,600 Statement of Retained Earnings Beginning Balance 322,000 95,000 95,000 322,000 Net Income 87,600 50,000 70,000 20,000 87,600 Less: Dividends Declared (30,000) (5,000) 5,000 (30,000) 165,00 Ending Balance 379,600 140,000 0 25,000 379,600 Balance Sheet Cash and Accounts Receivable 113,000 35,000 7,000 141,000 Inventory 260,000 90,000 350,000 Land 80,000 80,000 10,000 150,000 Buildings & Equipment 500,000 150,000 5,000 655,000 Less: Accumulated Depreciation (205,000) (45,000) 2,000 25,000 (273,000) 174,00 Investment in Lane Co. 191,600 8,000 0 0 25,600 Goodwill 32,000 32,000 241,60 Total Assets 939,600 310,000 47,000 0 1,055,000 Accounts Payable 60,000 20,000 7,000 73,000 Bonds Payable 200,000 50,000 250,000 100,00 Common Stock 300,000 100,000 0 300,000 165,00 Retained Earnings 379,600 140,000 0 25,000 379,600 NCI in NA of Lane Co. 2,000 48,000 52,400 6,400 274,00 Total Liabilities & Equity 939,600 310,000 0 79,400 1,055,000
  • 5. P7-32 (continued) These financial statements are based on the corrected numbers: c. Prime Company and Subsidiary Consolidated Balance Sheet December 31, 20X6 Cash and Receivables $ 141,000 Inventory 350,000 Land 150,000 Buildings and Equipment $655,000 Less: Accumulated Depreciation (273,000) 382,000 Goodwill 32,000 Total Assets $1,055,000 Accounts Payable $ 73,000 Bonds Payable 250,000 Stockholders’ Equity: Controlling Interest: Common Stock $300,000 Retained Earnings 379,600 Total Controlling Interest $679,600 Total Noncontrolling Interest 52,400 Total Stockholders’ Equity 732,000 Total Liabilities and Stockholders' Equity $1,055,000
  • 6. Prime Company and Subsidiary Consolidated Income Statement Year Ended December 31, 20X6 Sales $ 370,000 Cost of Goods Sold $200,000 Depreciation and Amortization Expense 38,000 Goodwill Impairment Loss 18,000 Other Expenses 20,000 Total Expenses (276,000) Consolidated Net Income $ 94,000 Income to Noncontrolling Interest (6,400) Income to Controlling Interest $ 87,600 Prime Company and Subsidiary Consolidated Retained Earnings Statement Year Ended December 31, 20X6 Retained Earnings, January 1, 20X6 $ 322,000 Income to Controlling Interest, 20X6 87,600 $ 409,600 Dividends Declared, 20X6 (30,000) Retained Earnings, December 31, 20X6 $ 379,600
  • 7. P7-32 (continued) b. This worksheet is based on the uncorrected numbers: Prime Lane Elimination Entries Co. Co. DR CR Consolidated Income Statement Sales 240,000 130,000 370,000 Gain on Sale of Equipment 20,000 20,000 0 (140,000 Less: COGS ) (60,000) (200,000) Less: Depr.&Amort. Expense (25,000) (15,000) 2,000 (38,000) Less: Other Expenses (15,000) (5,000) (20,000) Less: Goodwill Impairment Loss 18,000 (18,000) Income from Lane Co. 7,600 22,000 14,400 0 Consolidated Net Income 87,600 50,000 60,000 16,400 94,000 NCI in Net Income 10,000 3,600 (6,400) Controlling Interest in NI 87,600 50,000 70,000 20,000 87,600 Statement of Retained Earnings Beginning Balance 330,000 95,000 95,000 330,000 Net Income 87,600 50,000 70,000 20,000 87,600 Less: Dividends Declared (30,000) (5,000) 5,000 (30,000) 165,00 Ending Balance 387,600 140,000 0 25,000 387,600 Balance Sheet Cash and Accounts Receivable 113,000 35,000 7,000 141,000 Inventory 260,000 90,000 350,000 Land 80,000 80,000 10,000 150,000 Buildings & Equipment 500,000 150,000 5,000 655,000 Less: Accumulated (205,000 Depreciation ) (45,000) 2,000 25,000 (273,000) 174,00 Investment in Lane Co. 199,600 8,000 0 8,000 25,600 Goodwill 32,000 32,000 241,60 Total Assets 947,600 310,000 47,000 0 1,063,000 Accounts Payable 60,000 20,000 7,000 73,000 Bonds Payable 200,000 50,000 250,000 100,00 Common Stock 300,000 100,000 0 300,000 165,00 Retained Earnings 387,600 140,000 0 25,000 387,600 NCI in NA of Lane Co. 2,000 48,000 52,400 6,400 274,00 Total Liabilities & Equity 947,600 310,000 0 79,400 1,063,000
  • 8. P7-32 (continued) These financial statements are based on the uncorrected numbers: c. Prime Company and Subsidiary Consolidated Balance Sheet December 31, 20X6 Cash and Receivables $ 141,000 Inventory 350,000 Land 150,000 Buildings and Equipment $655,000 Less: Accumulated Depreciation (273,000) 382,000 Investment in Lane Co. 8,000 Goodwill 32,000 Total Assets $1,063,000 Accounts Payable $ 73,000 Bonds Payable 250,000 Stockholders’ Equity: Controlling Interest: Common Stock $300,000 Retained Earnings 387,600 Total Controlling Interest $687,600 Total Noncontrolling Interest 52,400 Total Stockholders’ Equity 740,000 Total Liabilities and Stockholders' Equity $1,063,000
  • 9. Prime Company and Subsidiary Consolidated Income Statement Year Ended December 31, 20X6 Sales $ 370,000 Cost of Goods Sold $200,000 Depreciation and Amortization Expense 38,000 Goodwill Impairment Loss 18,000 Other Expenses 20,000 Total Expenses (276,000) Consolidated Net Income $ 94,000 Income to Noncontrolling Interest (6,400) Income to Controlling Interest $ 87,600 Prime Company and Subsidiary Consolidated Retained Earnings Statement Year Ended December 31, 20X6 Retained Earnings, January 1, 20X6 $ 330,000 Income to Controlling Interest, 20X6 87,600 $ 417,600 Dividends Declared, 20X6 (30,000) Retained Earnings, December 31, 20X6 $ 387,600