10/3/2017 Chapter 5 HW

 
 7. Award: 14.32 points Problems? Adjust credit for all students.

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 $480,000. At the acquisition date, the fair value of the noncontrolling interest
was $320,000 and Keller’s book value was $630,000. Keller had developed internally a customer list that was not recorded on its books but had an acquisition-
date fair value of $170,000. This intangible asset is being amortized over 20 years.

Gibson sold Keller land with a book value of $80,000 on January 2, 2017, for $160,000. Keller still holds this land at the end of the current year.

Keller regularly transfers inventory to Gibson. In 2017, it shipped inventory costing $154,000 to Gibson at a price of $220,000. During 2018, intra-entity shipments
totaled $270,000, although the original cost to Keller was only $175,500. 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 $40,000 at the end of 2018.

Gibson Company Keller Company

Sales $ (870,000) $ (570,000)
Cost of goods sold 570,000 370,000
Operating expenses 170,000 60,000
Equity in earnings of Keller (84,000) 0
Net income $ (214,000) $ (140,000)
Retained earnings, 1/1/18 $ (1,186,000) $ (655,000)
Net income (above) (214,000) (140,000)
Dividends declared 150,000 60,000
Retained earnings, 12/31/18 $ (1,250,000) $ (735,000)
Cash $ 176,000 $ 80,000
Accounts receivable 370,000 480,000
Inventory 460,000 390,000

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Investment in Keller 819,000 0

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Land 180,000 460,000
Buildings and equipment (net) 503,000 370,000

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Total assets $ 2,508,000 $ 1,780,000

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Liabilities $ (598,000) $ (585,000)
Common stock (660,000) (390,000)
Additional paid-in capital 0 (70,000)

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Retained earnings, 12/31/18 (1,250,000) (735,000)
Total liabilities and equities

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(Note: Parentheses indicate a credit balance.)

a. Prepare a worksheet to consolidate the separate 2018 financial statements for Gibson and Keller.
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b. How would the consolidation entries in requirement (a) have differed if Gibson had sold a building with a $95,000 book value (cost of $210,000) to Keller for
$170,000 instead of land, as the problem reports? Assume that the building had a 10-year remaining life at the date of transfer.
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10/3/2017 Chapter 5 HW

Complete this question by entering your answers in the tabs below.

Required A Required B

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 Worksheet
For the Year Ending December 31, 2018
Consolidation Entries
Noncontrolling Consolidated
Accounts Gibson Keller Debit Credit
Interest Totals
Sales $ (870,000) $ (570,000) $ 270,000 $ (1,170,000)
Cost of goods sold 570,000 370,000 18,900 283,200 675,700
Operating expenses 170,000 60,000 8,500 238,500
Equity in earnings of Keller (84,000) 0 84,000
Separate company net income $ (214,000) $ (140,000)
Consolidated net income F
$ (255,800)
To noncontrolling interest (50,320) 50,320

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To Gibson Company F
$ (205,480)
Retained earnings, 1/1—Gibson $ (1,186,000) 93,020 $ (1,092,980)

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Retained earnings, 1/1—Keller (655,000) 655,000

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Net income (214,000) (140,000) (205,480)
Dividends declared 150,000 60,000 36,000 24,000 150,000

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Retained earnings, 12/31 $ (1,250,000) $ (735,000) $ (1,148,460)
Cash
rs e $ 176,000 $ 80,000
F

$ 256,000
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Accounts receivable 370,000 480,000 40,000 810,000
Inventory 460,000 390,000 18,900 831,100
Investment in Keller 819,000 36,000 855,000
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Land 180,000 460,000 80,000 560,000

Buildings and equipment (net) 503,000 370,000 873,000
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Customer list 161,500 8,500 153,000

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Total assets $ 2,508,000 $ 1,780,000 F

$ 3,483,100
Liabilities $ (598,000) $ (585,000) 40,000 $ (1,143,000)
Common stock (660,000) (390,000) 390,000 (660,000)
Additional paid-in capital (70,000) 70,000
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Retained earnings, 12/31 (1,250,000) (735,000) (1,148,460)

NCI in Keller, 1/1 505,320 (505,320)
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NCI in Keller, 12/31 $ (531,640) (531,640)

Total liabilities and equity $ (2,508,000) $ (1,780,000) F
$ 1,826,920 F
$ 1,826,920 F
$ (3,483,100)

 Required A Required B 
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Explanation:

Consideration transferred $ 480,000

Noncontrolling interest fair value 320,000
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Subsidiary fair value at acquisition-date $ 800,000

Book value (630,000)
Fair value in excess of book value $ 170,000
Remaining Annual Excess
Excess fair value assignment life Amortizations
to customer list 170,000 20 yrs. $ 8,500
0

a.
Consolidation entries

Event General Journal Debit Credit

Entry *TL Retained earnings, 1/1/18 (Gibson) 80,000
Land 80,000
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10/3/2017 Chapter 5 HW
2017.

Entry *G Retained earnings, 1/1/18 (Keller) 13,200

Cost of goods sold 13,200
To defer intra-entity upstream Inventory gross profit from 2017 until 2018
computed as the 2017 ending inventory balance of $44,000 (20% × $220,000)
multiplied by 30% gross profit rate ($66,000 ÷ $220,000).

Entry *C Retained earnings, 1/1/18 (Gibson) 13,020

Investment in Keller 13,020
Parent is applying the partial equity method as can be seen by the amount in the
Equity in earnings of Keller Company account (60 percent of the reported
balance). Thus, the parent’s share of amortization of $5,100 ($170,000 divided by
20 years × 60%) must be recognized for the previous year 2017. In addition, the
equity accrual recorded by the parent has been based on Keller's reported net
income. As shown in Entry *G, $13,200 of that reported net income relates to
intra-entity ending inventory as of January 1, 2018. Thus, the previous accrual
must be reduced by $9,500 to mirror the parent's 60% ownership. The total of the
two adjustments being made here is $13,020.

Entry S Common stock (Keller) 390,000

Additional paid-in capital 70,000
Retained earnings, 1/1/18 (Keller) (adjusted for Entry *G) 641,800
Investment in Keller (60%) 661,080
Noncontrolling Interest in Keller, 1/1/18 (40%) 440,720
To remove stockholders' equity accounts of Keller and recognize beginning
noncontrolling interest. Retained earnings balance has been adjusted in Entry *G.

Entry A Customer list 161,500

Investment in Keller 96,900
Noncontrolling interest in Keller, 1/1/18 (40%) 64,600
To recognize amount paid within acquisition price for the customer list. Original
balance is adjusted for previous year's amortization.

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Entry I Equity in earnings of Keller 84,000
Investment in Keller 84,000

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To eliminate intra-entity income accrual.

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Entry D Investment in Keller 36,000

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Dividends declared 36,000
To eliminate intra-entity (60%) dividend transfers.

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Entry E Amortization expense 8,500
Customer list 8,500

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To recognize current period excess amortization expense.
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Entry P Liabilities 40,000
Accounts receivable 40,000
To eliminate intra-entity debt.

Entry TI Sales 270,000

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Cost of goods sold 270,000

To eliminate current year intra-entity inventory transfer.
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Entry G Cost of goods sold 18,900

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Inventory 18,900
To defer 2018 intra-entity inventory gross profit in ending inventory. Intra-entity
gain is the ending inventory of $54,000 (20% of $270,000) multiplied by 35%
gross profit rate ($94,500 ÷ $270,000).

Net income attributable to noncontrolling interest

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Keller reported net income $ 140,000

Excess fair value amortization (8,500)
2017 Intra-entity gross profit recognized in 2018 (inventory) 13,200
2018 Intra-entity gross profit deferred (inventory) (18,900)
Keller realized income 2018 $ 125,800
Outside ownership percentage 40%
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Net income attributable to noncontrolling interest $ 50,320

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GIBSON AND KELLER

Consolidation Worksheet
For the Year Ending December 31, 2018
Consolidation Entries Noncontrolling Consolidated
Accounts Gibson Keller Debit Credit Interest Totals
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Sales $ (870,000) $ (570,000) (TI) 270,000 $ (1,170,000

Cost of goods sold 570,000 370,000 (G) 18,900 (*G) 13,200 675,700
(TI) 270,000
Operating expenses 170,000 60,000 (E) 8,500 238,500
Equity in earnings of Keller (84,000) 0 (I) 84,000 0
Separate company net income $ (214,000) $ (140,000)
Consolidated net income $ (255,800
To noncontrolling interest (50,320) 50,320
To Gibson Company $ (205,480
RE, 1/1—Gibson $ (1,186,000) (*TL) 80,000 $ (1,092,980
(*C) 13,020
RE, 1/1—Keller (655,000) (*G) 13,200
(S) 641,800
Net income (above) (214,000) (140,000) (205,480
Dividends declared 150,000 60,000 (D) 36,000 24,000 150,000
Retained
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 10/3/2017 Chapter 5 HW
Cash $ 176,000 $ 80,000 $ 256,000
Accounts receivable 370,000 480,000 (P) 40,000 810,000
Inventory 460,000 390,000 (G) 18,900 831,100
Investment in Keller 819,000 (D) 36,000 (*C) 13,020 0
(S) 661,080
(I) 84,000
(A) 96,900
Land 180,000 460,000 (*TL) 80,000 560,000
Buildings and equipment (net) 503,000 370,000 873,000
Customer list (A) 161,500 (E) 8,500 153,000
Total assets $ 2,508,000 $ 1,780,000 $ 3,483,100
Liabilities $ (598,000) $ (585,000) (P) 40,000 $ (1,143,000
Common stock (660,000) (390,000) (S) 390,000 (660,000
Additional paid-in capital (70,000) (S) 70,000
Retained earnings, 12/31 (1,250,000) (735,000) (1,148,460
NCI in Keller, 1/1 (S) 440,720 (440,720)
(A) 64,600 (64,600)
NCI in Keller, 12/31 (531,640) (531,640
Total liabilities and equity $ (2,508,000) $ (1,780,000) $ 1,826,920 $ 1,826,920 $ (3,483,100

Consolidation entries:

(*TL) Elimination of effects of intra-entity transfer of land.

(*G) Removal of unrealized gross profit from beginning figures so that it can be recognized in current period. Downstream sales attributed to parent.
(S) Elimination of subsidiary’s stockholders’ equity accounts along with recognition of the noncontrolling interest as of January 1.
(A) Allocation of excess fair value over subsidiary’s book value, unamortized balance as of January 1.
(I) Elimination of intra-entity income.
(D) Elimination of intra-entity dividend.
(E) Recognition of amortization expense for current year on excess fair value allocated to database.
(P) Elimination of intra-entity receivable/payable balances.

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(TI) Elimination of intra-entity sales/purchases balances.
(G) Removal of unrealized gross profit from ending figures so that it can be recognized in subsequent period.

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b.

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If the intra-entity transfer had been a building rather than land, two adjustments to the consolidation entries would be needed. Entry *TL would be changed and

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relabeled as Entry *TA and an Entry ED would be added to eliminate the overstatement of depreciation expense for 2018. All other consolidation entries would be
the same as shown in Part a. As a downstream transfer, entries *C and S are not affected.

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Entry *TA

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To defer intra-entity gain ($75,000 original amount less one year of excess depreciation at $7,500 per year) as of beginning of year. Entry also returns Buildings
account to historical cost (from $170,000 to $210,000) and Accumulated Depreciation account to historical cost (original $115,000 less one year of excess
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depreciation at $7,500).

Entry ED
To remove excess depreciation for current year created by transfer price. Excess depreciation for each year would be $7,500 based on allocating the $95,000
historical cost book value over 10 years ($9,500 per year) rather than the $170,000 transfer price ($17,000 per year).
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References eBook & Resources

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Financial Statements Learning Objective: 05-03 Explain
why consolidated entities defer
intra-entity gross profit in ending
inventory and the consolidation
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Learning Objective: 05-06 Prepare the consolidation entry to defer
any gain created by an intra-entity transfer of land from the
accounting records of the year of transfer and subsequent years.

procedures required to
subsequently recognize profits.
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Difficulty: 3 Hard Learning Objective: 05-04
Understand that the consolidation
process for inventory transfers is
designed to defer the intra-entity
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Learning Objective: 05-07 Prepare the consolidation entries to
remove the effects of upstream and downstream intra-entity fixed
asset transfers across affiliated entities.

gross profit remaining in ending

inventory from the year of transfer
into the year of disposal or
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consumption.

Learning Objective: 05-01 Learning Objective: 05-05 Explain

Understand why intra- the difference between upstream
entity asset transfers and downstream intra-entity
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create accounting effects transfers and how each affects the

within the financial computation of noncontrolling
records of affiliated interest balances.
companies that must be
eliminated or adjusted in
preparing consolidated
financial statements.

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