The individual financial statements for Gibson Company and Keller Company for th
ID: 2466039 • Letter: T
Question
The individual financial statements for Gibson Company and Keller Company for the year ending December 31, 2011, follow. Gibson acquired a 60 percent interest in Keller on January 1, 2010, in exchange for various considerations totalling $570,000. At the acquisition date, the fair value of the noncontrolling interest was $380,000 and Keller’s book value was $850,000. Keller had developed internally a customer list that was not recorded on its books but had an acquisition-date fair value of $100,000. This intangible asset is being amortized over 20 years.
Gibson sold Keller land with a book value of $60,000 on January 2, 2010, for $100,000. Keller still holds this land at the end of the current year.
Keller regularly transfers inventory to Gibson. In 2010, it shipped inventory costing $100,000 to Gibson at a price of $150,000. During 2011, intra-entity shipments totalled $200,000, although the original cost to Keller was only $140,000. 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 2011.
Gibson Keller
Company Company
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (800,000) $ (500,000)
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000 300,000
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 60,000
Income of Keller Company . . . . . . . . . . . . . . . . . . . . (84,000) –0–
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (284,000) $ (140,000)
Retained earnings, 1/1/11 . . . . . . . . . . . . . . . . . . . . . $(1,116,000) $ (620,000)
Net income (above) . . . . . . . . . . . . . . . . . . . . . . . . . (284,000) (140,000)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,000 60,000
Retained earnings, 12/31/11 . . . . . . . . . . . . . . . . . $(1,285,000) $ (700,000)
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 177,000 $ 90,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . 356,000 410,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 440,000 320,000
Investment in Keller Company . . . . . . . . . . . . . . . . . 726,000 –0–
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000 390,000
Buildings and equipment (net) . . . . . . . . . . . . . . . . . 496,000 300,000
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,375,000 $ 1,510,000
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (480,000) $ (400,000)
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (610,000) (320,000)
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . –0– (90,000)
Retained earnings, 12/31/11 . . . . . . . . . . . . . . . . . . . (1,285,000) (700,000)
Total liabilities and equities . . . . . . . . . . . . . . . . . . $(2,375,000) $(1,510,000)
How would the consolidation entries in requirement (a) have differed if Gibson had sold a building with a $60,000 book value (cost of $140,000) to Keller for $100,000 instead of land, as the problem reports? Assume that the building had a 10-year remaining life at the date of transfer.
Explanation / Answer
Entry 1
Retained Earnings, 1/1/10 (Gibson) 36,000
Buildings 40,000
Accumulated Depreciation 76,000
To eliminate unrealized gain ($40,000 original amount less one year of excess depreciation at $4,000 per year) as of beginning of year. Entry also returns Buildings account to historical cost (from $100,000 to $140,000) and Accumulated Depreciation account to historical cost (original $80,000 less one year of excess depreciation at $4,000). Because the Buildings account is shown at net value in the information given in this problem, the above entry would probably be made as follows:
Entry 2 (Alternative)
Retained Earnings, 1/1/10 (Gibson) 36,000
Buildings (net ) 36,000
Entry 3
Accumulated Depreciation 4,000
Operating (or Depreciation) Expense 4,000
To remove excess depreciation for current year created by transfer price. Excess depreciation for each year would be $4,000 based on allocating the $60,000 historical cost book value over 10 years ($6,000 per year) rather than the $100,000 transfer price ($10,000 per year).
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