On January 1, 2012, P Company acquires an 80 percent interest in S Company. The

Question

On January 1, 2012, P Company acquires an 80 percent interest in S Company. The cost of the acquisition which is for cash in the open market, is $700,000. The value of the noncontrolling interest at the date of purchase was $175,000. On the date of acquisition, S Company has Capital Stock of $250,000 and Retained Earnings of $150,000. In their evaluation of the fair values of the assets and liabilities of S Company, the management of P Company determines that only one asset, building has a fair value different from book value. The fair value of the building, (which is included in Plant Assets) was $85,000 higher than its book value. The building has a remaining life of 4 years.

The affiliates regularly engage in transactions with each other. During 2012 and 2013, S Company had the following sales to P Company:
Year       Cost to S   Transfer price to P Co       Ending Balance (at transfer price)
2012       $80,000       $100,000           $18,000
2013       $56,000       $80,000               $6,000

S Company sold a piece of Land to P Company on January 1, 2012 for $50,000. The original cost of the land was $20,000.

P Company accounts for its investment in S Company using the equity method.

REQUIRED:

1.   Prepare an allocation of excess.
2.   Prepare eliminating journal entires (need to write out the journal entries).
3.   Finish the consolidated financial statement working papers for P Company and S Company for the year ended December 31, 2013.

Consolidation entries Noncontrolling Interest Consolidated Totals INCOME STATEMENT P Comp S Comp. Debit Credit Sales $        (1,675,000) $        (530,000) Equity earnings in S Comp. $             (44,440) Cost of sales $         1,275,000 $         420,000 Expenses $            175,000 $           35,000 Separate Company Net Income $           (269,440) $          (75,000) Consolidated Net Income NCI in S Company's Net Income P's interest in Consolidated Net Income RETAINED EARNINGS Retained earnings-1/1/13 $           (585,000) $        (380,000) Net Income $           (269,440) $          (75,000) Dividends Paid $            120,000 $           45,000 Retained earnings December 31 2013 $           (734,440) $        (410,000) BALANCE SHEET Cash $              26,500 $           40,000 Inventories $            210,000 $         150,000 Accounts receivable $            110,000 $           40,000 Land $              50,000     Plant assets - net $            564,880 $         550,000 Investment in S Co. $            848,560 TOTALS $         1,809,940 $         780,000 Consolidation entries Noncontrolling Interest Consolidated Totals P Comp S Comp. Debit Credit Accounts payable $           (325,500) $        (120,000) Noncontrolling interest in S Comp, 1/1/2013 Noncontrolling interest in S Comp, 12/31/13 Common Stock $           (750,000) $        (250,000) Retained earnings $           (734,440) $        (410,000) TOTALS $        (1,809,940) $        (780,000)

Explanation / Answer

1)

Company implied fair value Parent price 80% NCI value 20% Price paid for investment $875,000 $700,000 $175,000 Less: book value of Interest Acquired Common stock $250,000 Retained Earnings $150,000 Total Equity $400,000 $400,000 $400,000 Interest Acquired 80.00% 20.00% Book value of interest $320,000 $80,000 Excess of cost over book value $475,000 $380,000 $95,000

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