27/03/2020 Assignment Print View

Score:8.80/20 Points 44 %
13.
Award: 0 out of 1.25 points

Problem 5-26 (LO 5-3, 5-4, 5-5, 5-7)

On January 1, 2018, Sledge had common stock of $160,000 and retained earnings of $300,000. During that year, Sledge reported
sales of $170,000, cost of goods sold of $90,000, and operating expenses of $44,000.

On January 1, 2016, Percy, Inc., acquired 70 percent of Sledge's outstanding voting stock. At that date, $64,000 of the acquisition-
date fair value was assigned to unrecorded contracts (with a 20-year life) and $24,000 to an undervalued building (with a 10-year
remaining life).

In 2017, Sledge sold inventory costing $10,450 to Percy for $19,000. Of this merchandise, Percy continued to hold $9,000 at year-
end. During 2018, Sledge transferred inventory costing $14,400 to Percy for $24,000. Percy still held half of these items at year-end.

On January 1, 2017, Percy sold equipment to Sledge for $14,000. This asset originally cost $20,000 but had a January 1, 2017, book
value of $9,800. 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.

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27/03/2020 Assignment Print View

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

Required A Required B

Prepare worksheet entries to consolidate these two companies as of December 31, 2018. (If no entry is required for a
transaction/event, select "No journal entry required" in the first account field.)

No Transaction Accounts Debit Credit

1 1

2 2

3 3

4 4

5 5

6 6

7 7

8 8

9 9

 Required A Required B 

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References

Consolidating Learning Objective: 05-03 Learning Objective: 05-07 Prepare the consolidation
Entries Explain why consolidated entries to remove the effects of upstream and
entities defer intra-entity downstream intra-entity fixed asset transfers across
gross profit in ending affiliated entities.
inventory and the
consolidation procedures
required to subsequently
recognize profits.

Problem 5-26 (LO 5- Learning Objective: 05-04

3, 5-4, 5-5, 5-7) Understand that the
consolidation process for
inventory transfers is
designed to defer the intra-
entity gross profit
remaining in ending
inventory from the year of
transfer into the year of
disposal or consumption.

Difficulty: 2 Medium Learning Objective: 05-05

Explain the difference
between upstream and
downstream intra-entity
transfers and how each
affects the computation of
noncontrolling interest
balances.

Problem 5-26 (LO 5-3, 5-4, 5-5, 5-7)

On January 1, 2018, Sledge had common stock of $160,000 and retained earnings of $300,000. During that year, Sledge reported
sales of $170,000, cost of goods sold of $90,000, and operating expenses of $44,000.

On January 1, 2016, Percy, Inc., acquired 70 percent of Sledge's outstanding voting stock. At that date, $64,000 of the acquisition-
date fair value was assigned to unrecorded contracts (with a 20-year life) and $24,000 to an undervalued building (with a 10-year
remaining life).

In 2017, Sledge sold inventory costing $10,450 to Percy for $19,000. Of this merchandise, Percy continued to hold $9,000 at year-
end. During 2018, Sledge transferred inventory costing $14,400 to Percy for $24,000. Percy still held half of these items at year-end.

On January 1, 2017, Percy sold equipment to Sledge for $14,000. This asset originally cost $20,000 but had a January 1, 2017, book
value of $9,800. 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.

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

Required A Required B

Prepare worksheet entries to consolidate these two companies as of December 31, 2018. (If no entry is required for a
transaction/event, select "No journal entry required" in the first account field.)

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27/03/2020 Assignment Print View

No Transaction Accounts Debit Credit

1 1 Retained earnings 4,050
Cost of goods sold 4,050

2 2 Equipment 6,000
Investment in Sledge 3,360
Accumulated depreciation 9,360

3 3 Common stock 160,000

Retained earnings 295,950
Investment in Sledge 319,165
Noncontrolling interest in Sledge 136,785

4 4 Contracts 57,600
Buildings 19,200
Investment in Sledge 53,760
Noncontrolling interest in Sledge 23,040

5 5 Equity in income of Sledge 21,595

Investment in Sledge 21,595

6 6 Depreciation expense 2,400

Amortization expense 3,200
Contracts 3,200
Buildings 2,400

7 7 Sales 24,000
Cost of goods sold 24,000

8 8 Cost of goods sold 4,800

Inventory 4,800

9 9 Accumulated depreciation 840

Depreciation expense 840

 Required A Required B 

Explanation:

a.
Entry *G
To remove intra-entity gross profit from beginning account balances. (45% gross profit rate ($8,550 ÷ $19,000) × remaining
inventory ($9,000).
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Entry *TA
To adjust the equipment balance to original cost ($20,000) and to adjust accumulated depreciation to the consolidated January 1,
2018 balance ($10,200 less $840 extra depreciation in 2017).

The $3,360 debit to the Investment account transfers the reduction in the net book value of the transferred equipment to the
equipment and A.D. accounts. The Investment account was reduced by $4,200 in 2017 for the original intra-entity gain and increased
by $840 in 2017 for the extra depreciation ($4,200 gain ÷ 5 years) through application of the equity method. Entry ED (below)
completes the adjustment of A.D. and depreciation expense to their consolidated December 31, 2018 balances.

Entry S
To eliminate subsidiary's stockholders' equity accounts (after adjustment for Entry *G) and recognize noncontrolling interest balance
as of January 1, 2018.

Entry A
To recognize acquisition-date fair value allocations adjusted for 2 years of amortization (2016 and 2017).

Entry I
To remove parent’s equity method income.

Subsidiary reported net income $ 36,000

Recognize upstream intra-entity gross profit in beg. inventory
Intra-entity inventory year-end 2017 (upstream) $ 9,000
Gross profit rate ($8,550 ÷ 19,000) .45
Intra-entity gross profit in 2018 beginning inventory 4,050
Defer upstream intra-entity gross profit in ending inventory
Intra-entity inventory year-end 2018 (upstream) $ 12,000
Gross profit rate ($9,600 ÷ 24,000) .40
Intra-entity gross profit in 2018 ending inventory (4,800)
Excess amortization (5,600)
2018 adjusted subsidiary net income $ 29,650
Parent’s ownership percentage 70%
Parent’s share of subsidiary adjusted net income $ 20,755
Depreciation adjustment from 2017 downstream fixed asset sale 840
Intra-entity gain recognition from downstream fixed asset sale: $4,200 intra-
entity profit ÷ 5 years = $840 per year.
Parent’s recorded 2018 equity income from subsidiary $ 21,595

Entry E
Contracts ($64,000 ÷ 20 years) = $ 3,200
Buildings ($24,000 ÷ 10 years) = $ 2,400

To recognize 2018 excess amortizations.

Entry TI
To eliminate intra-entity inventory transfers during 2018.

Entry G
To remove intra-entity gross profit from ending account balances. (40% gross profit rate ($9,600 ÷ $24,000) × remaining inventory
($12,000).

Entry ED
To eliminate excess depreciation on equipment recorded at transfer price. Expense is being reduced from the recorded amount
($2,800 or $14,000 ÷ 5) to historical cost figure ($1,960 or $9,800 ÷ 5). Also increases consolidated net income to recognize the 2018
portion of the deferred intra-entity gain.

b.
Net income attributable to noncontrolling interest (2018)

Revenues $ 170,000
Cost of goods sold (90,000)
Other expenses (44,000)
Excess acquisition-date fair value amortization (5,600)

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Net income adjusted for amortization $ 30,400
Gross profit on 2017 upstream inventory transfer recognized in 2018
(Entry *G) 4,050
Gross profit on 2018 upstream inventory transfer deferred until 2019
(Entry G) (4,800)
Adjusted net income of subsidiary—2018 $ 29,650
Outside ownership 30%
Net income attributable to noncontrolling interest $ 8,895

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