Chapter 5, Problem 5.6P

To determine

Introduction:

Subsidiary company: It is also called as Daughter Company. A subsidiary company is owned and controlled by another company. This kind of company can be one of the several owners or may also be the sole owner. If the holding company or a parental company own a hundred percent of another company, then it is regarded as a ‘wholly-owned subsidiary’.

Consolidation is the process of combining the financial statement of the parent company and its subsidiaries. A consolidated balance sheet shows the combined balances of the parent company and its subsidiaries. Similarly, a consolidated income statement shows the combined net income of the parent company and its subsidiaries.

To prepare: The worksheet necessary to produce the consolidated financial statements for postman Company and its subsidiary Spartan Company for the year ended December 31, 2015. Include the determination and distribution of excess and income distribution schedules.

Explanation of Solution

Adjustments of accounts to be amortized:

Accounts Adjustments to be Amortized	Life (Years)	Annual Amount ($)	Current year ($)	Prior Years ($)	Total
Buildings	20	6,500	6,500	6,500	13,000
Equipment	5	10,000	10,000	10,000	20,000
Total Amortizations		16,500	16,500	16,500	33,000

Following is the computation of intercompany inventory profit:

Particulars	Parent Amount	Parent %	Parent Profit ($)	Sub Amount ($)	Sub Percent	Sub Profit ($)
Beginning	-	0%	-	9,000	25%	2,250
Ending	-	0%	-	12,000	25%	3,000

Now, following is the computation of internally generated income of the company:

For Company S,

Given: Sale of S Company is $320,000, COGS is $200,000, Depreciation expenses on building is $5,000, Depreciation expenses on equipment is $10,000, other expenses ar $70,000 and interest expense is $7,676.

  $\begin{array}{c}\text{Internally Generated Income}=\text{S Company Sales }\\ \text{– }\left(\begin{array}{l}\text{COGS}+\text{Depreciation expnses on building }\\ +\text{Depreciation expenses on equipment}\\ +\text{other expenses}+\text{Interest expenses}\end{array}\right)\\ =\$320,000-\left(\begin{array}{l}\$200,000+\$5,000+\\ \$10,000+\$70,000+\$7,656\end{array}\right)\\ =\$27,324\end{array}$

For Company P,

Given: Sales of P Company is $850,000, COGS is $500,000, Depreciation expenses on building are $30,000, Depreciation expenses on equipment are $15,000 and other expenses are $140,000.

  $\begin{array}{c}\text{Internally Generated Income}=\text{P Company Sales }\\ \text{– }\left(\begin{array}{l}\text{COGS}+\text{Depreciation expnses on building }\\ +\text{Depreciation expenses on equipment}\\ +\text{ other expenses}\end{array}\right)\\ =\$850,000-\left(\begin{array}{l}\$500,000+\$30,000\\ +\$15000+\$140,000\end{array}\right)\\ =\$173,596\end{array}$

Following is the computation of income distribution of subsidiary of S Company:

Particulars	Amount ($)	Particulars	Amount ($)
Amortizations Ending Inventory profit Interest adjustment, bonds	16,500 3,000 920	Internally Generated Net Income Beginning Inventory Profit Gain on Bond Retirement Adjusted Income Non-Controlling Interests share Non-controlling Interest	27,324 2,250 6,883 15987 20% 3,197

Following is the computation of income distribution of parent P Company:

Particulars	Amount ($)	Particulars	Amount ($)
		Internally Generated Income Adjusted Income Share (S Company) (80% of $15,987) Controlling Interest	173,596 12,790 186,386

WORKSHEET:

Particulars	Trial Balance		Elimination and Adjustments		Consolidated B/S ($)	NCI ($)	Controlling R/E ($)	Consolidated B/S ($)
	P ($)	S ($)	Debit ($)	Credit ($)
Cash	1,44,486	99347						243833
Accounts Receivable	90000	60000		7000				143000
Inventory	120000	55000		3000				172000
Land	200000	60000						260000
Investment in S stock	429859			21859
	-		8000
	-			176000
	-			240000
Investment in S Bonds	96110			96110
Buildings	600000	100000	130000					830000
Accumulated Depreciation	-310000	-40000		13000				-363000
Equipment	150000	80000	50000					-280000
Accumulated Depreciation	-90000	-50000		20000				-160000
Goodwill			120000					120000
Accounts Payable	-55000	-25000	7000					-73000
Bonds Payable		-100000	100000
Discount (Premium)		2023	2023
Common Stock ($1 par) S. Co.		-10000	8000			-2000
Paid-in-capital in excess of par - S. Co.		-90000	72000			-18000
Retained Earnings - S. Co.		-120000	96000	60000
			3300
			450			-80250
Common Stock	-100000							-100000
Paid-in-capital in excess of Par - P. Co.	800000							-800000
Retained Earnings	300000		13200
			51800				-285000
Gain on Bond Retirement				6833	-6833
Sales	-850000	-320000	20000		-1150000
Cost of goods sold	500000	200000		20000
			3000	52250	680750
Depreciation - Building	30000	5000	6500		41500
Depreciation - Equipment	15000	10000	10000		35000
Other Expenses	140000	70000			210000
Interest Expense		7676		57676
Interest Revenue	-8596		8596
Subsidiary Income	-21859		21859
Dividend Declare - S. Co.		10000		8000		2000
Dividend Declare - P. Co.	20000						20000
Total	0	0	681726	681728
Consolidated Net Income					-189583
Non - Controlling Interest					3187	-3197
Controlling Interest					186386		-186386
Total Non-Controlling Interests						-101477		-101447
Retained Earnings - Controlling interest, 31 Dec, 2015							-451386	-451386
Total								0

Eliminations and Adjustments are made in the following:

1. Current-year subsidiary income.
2. Current-year dividend.
3. Eliminate controlling interest in subsidiary equity.
4. Distribute excess and adjust NCI.
5. Eliminate intercompany sales during the current period.
6. Eliminate intercompany unpaid trade accounts.
7. Defer beginning inventory profit.
8. Defer ending inventory profit.
9. Eliminate intercompany bonds.

Computation of proof for the Elimination of Bonds:

Particulars	Amount ($)	Amount ($)
Gain remaining at year (end):
Carrying Value at December 31, 2015	102,023
Investment in bonds at December 31, 2015	96,110	5,913
Loss amortized during the year:
Interest expense eliminated	8,596
Interest Revenue Eliminated	7,676	920
Gain at January 1, 2015		6,833