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Chapter 6 Exercise 4 On January 1, 2011, Pearce Company purchased an 80% interest in the capital stock of Searl Company
for $2,460,000. At that time, Searl Company had capital stock of $1,500,000 and retained earnings of $300,000. The difference
between book of value Searl equity and the value implied by the purchase price was attributed to specific assets of Searl
Company as follows: 375,000 to equipment of Searl Company with a five-year remaining life. 187,500 to land held by Searl
Company. 112,500 to inventory of Searl Company. Searl uses the FIFO assumption In pricing its inventory, and 600,000 that
could not be assigned to specific assets or liabilities of Searl Company. 1,275,000 Total At year-end 2011 and 2012, Searl had in
its inventory merchandise that it had purchased from Pearce at a 25% markup on cost during each year in the following
amounts: 2011 $90,000 2012 $105,000 During 2011, Pearce reported net income from independent operations (including sales
to affiliates) of $1,500,000, while Searle reported net income of $600,000. In 2012, Pearces net income from independent
operations (including sales to affiliates) was $1,800,000 and Searls was $750,000. Calculate the controlling interest in
consolidated net income for 2011 and 2012.
The $600,000 that could not be assigned to specific assets and liabilities is assumed to represent goodwill (the unidentifiable
intangible asset), which is not amortized under current GAAP but is reviewed periodically for impairment. In contrast, identifiable
intangible assets would be amortized if they have a definite life but not if the life is indefinite in duration. Thus, only if the $600,000
pertained to an identifiable intangible asset with a finite life would amortization be required. We assume that is not the case here.
2011
Pearce Company's net income from its independent operations $1,500,000
$90 ,000
Amount of income not realized in transactions with third parties ($90,000 ) (18,000)
1.25
Pearce Company's income from its independent operations that has been realized
in transactions with third parties 1,482,000
Pearce's share of Searl Company adjusted income that has been realized in transactions
with third parties ($412,500* 0.80) 330,000*
Controlling interest in consolidated net income for 2011 $1,812,000
*[$600,000 ($75,000 + $112,500)] x 0.80 = 330,000,
where $75,000 = $375,000/5
Alternatively,
Controlling Interest in Consolidated Income
Net income internally generated by Pearce Company $1,500,000
Unrealized profit on downstream Realized profit (downstream sales) from begin. inventory
sales to Searl Company (ending
Inventory) ($90,000 $90,000/1.25) 18,000 Pearce Company's percentage of Searl Company's income
realized from third parties, .80($412,500) 330,000
2012
Pearce Company's net income from its independent operations $1,800,000
Less profit included therein that has not been realized in transactions with third parties
($105,000 ($105,000/1.25)) (21,000)
Plus profit realized in 2012 ($90,000 ($90,000/1.25)) 18,000
Pearce Company's income from its independent operations that has been realized
in transactions with third parties 1,797,000
Pearce's share of Searl Company adjusted income that has been realized in transactions
with third parties ($675,0000 .80) 540,000
Controlling interest in consolidated net income for 2012 $2,337,000
Alternatively,
Controlling Interest in Consolidated Income
Net income internally generated by Pearce Company $1,800,000
Unrealized profit on
downstream Realized profit (downstream sales) from begin. inventory 18,000
sales to Searl Company (ending
Inventory) 21,000 Pearce Company's percentage of Searl Company's income
realized from third parties, .80($675,000) 540,000
Chapter 6 Exercise 5 Refer to Exercise 6-4. Using the same figures, assume that the merchandise mentioned was included in
Pearces inventory, having been purchased from Searl. Calculate the controlling interest in consolidated net income for 2011
and 2012.
2011
Pearce Company's income from its independent operations $1,500,000
Plus: Pearce Company's interest in the realized net income of Searl Company:
Reported Net income $600,000
Less Amortization of difference between implied and book value
($75,000 + $112,500) (187,500)
$90 ,000
Less unrealized profit included therein ($90,000 - ) (18,000)
1.25
Income realized in transaction with third parties $394,500
Pearce Company's interest therein (0.8 $394,500) $315,600
Controlling interest in consolidated net income $1,815,600
2012
Pearce Company's income from its independent operations $1,800,000
Plus: Pearce Company's interest in the realized net income of Searl Company:
Reported Net income $750,000
Less amortization of difference between implied and book value (75,000)
Less profit included therein that has not been realized in transactions
$105,000
with third parties ($105,000 - ) (21,000)
1.25
$90 ,000
Plus profit realized in 2012 ($90,000 - ) 18,000
1.25
Income realized in transaction with third parties $672,000
Pearce Company's interest therein (0.8 $672,000) 537,600
Controlling interest in consolidated net income $2,337,600
Chapter 6 Problem 16 Pruitt Corporation owns 90% of the common stock of Sedbrook Company. The stock was purchased
for $540,000 on January 1, 2009, when Sedbrook Companys retained earnings were $100,000. Preclosing trial balances for the
two companies at December 31, 2013 are presented here: Pruitt Corporation Sedbrook Company Cash $83,000 $80,000
Accounts Receivable 213,000 112,500 Inventory 1/1 150,000 110,000 Investment in Sedbrook Co. 568,250 Other Assets 500,000
400,000 Dividends Declared 100,000 30,000 Purchases 850,000 350,000 Other Expenses 180,000 137,500 2,644,250 1,220,000
Accounts Payable 70,000 30,000 Other Liabilities 75,000 40,000 Common Stock 800,000 500,000 Retained Earnings, 1/1
532,000 120,000 Sales 1,100,000 530,000 Equity in Subsidiary Income 67,250 2,644,250 1,220,000 Ending Inventory 200,000
120,000 The January 1, 2013, inventory of Sedbrook Company includes $30,000 of profit recorded by Pruitt Corporation on
2012 sales. During 2013, Pruitt Corporation made intercompany sales of $200,000 with a markup of 25% on cost. The ending
inventory of Sedbrook Company includes good purchased in 2013 from Pruitt for $50,000, Pruitt Corporation uses the
complete equity method to records its investment in Sedbrook Company. A. Prepare the consolidated statements workpaper
for the year ended December 31, 2013. B. Calculate the consolidated retained earnings on December 31, 2013, using the
analytical or t-account approach.
Net income from above 140,625 71,250 406,125 345,000 10,125 140,625
Dividends declared
Paque Corporation (150,000) (150,000)
Segal Company (60,000) (1) 54,000 (6,000)
12/31 Retained earnings to balance sheet 788,625 191,250 586,125 399,000 4,125 788,625
Part B
Paque Corporation's Retained Earnings on 12/31/2013 $ 788,625
Consolidated retained earnings on 12/31/2013 $ 788,625