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Chapter 5 Tutorial Exercise

The document contains practice exercises and solutions related to accounting for subsidiaries. Exercise 18 involves calculating the investment account balance and adjustments for Corgan's investment in Smashing. It records Smashing's net income, dividends, covenants amortization, and inventory profit deferrals for 2020 and 2021. Exercise 21 involves calculating the noncontrolling interest's share of a subsidiary's net income and providing journal entries to eliminate intra-entity profits from inventory sales.

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Farheen Akram
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57 views

Chapter 5 Tutorial Exercise

The document contains practice exercises and solutions related to accounting for subsidiaries. Exercise 18 involves calculating the investment account balance and adjustments for Corgan's investment in Smashing. It records Smashing's net income, dividends, covenants amortization, and inventory profit deferrals for 2020 and 2021. Exercise 21 involves calculating the noncontrolling interest's share of a subsidiary's net income and providing journal entries to eliminate intra-entity profits from inventory sales.

Uploaded by

Farheen Akram
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Chapter 5

Exercise 17:

We solved together during tutorial as class activity

Exercise 18:

Consideration transferred by Corgan $980,000

Noncontrolling interest fair value 245,000

Smashing’s acquisition-date fair value 1,225,000

Book value of subsidiary 950,000

Excess fair over book value 275,000

Excess assigned to covenants 275,000


Remaining useful life in years ÷ 20

Annual amortization $13,750

2020 Ending Inventory Profit Deferral

 Cost = $100,000 ÷ 1.6 = $62,500


 Intra-entity gross profit = $100,000 – $62,500 = $37,500
 Ending inventory gross profit = $37,500 × 40% = $15,000

2021 Ending Inventory Profit Deferral

 Cost = $120,000 ÷ 1.6 = $75,000


 Intra-entity gross profit = $120,000 – $75,000 = $45,000
 Ending inventory gross profit = $45,000  40% = $18,000

 a. Investment account:

 Consideration transferred, January 1, 2020 $980,000


 Smashing’s 2020 net income × 80% $120,000
 Covenant amortization (13,750 × 80%) (11,000)
 Ending inventory profit deferral (100%) (15,000)

 Equity in Smashing’s earnings 94,000


 2020 dividends (28,000

 Investment balance 12/31/20 $1,046,000


 Smashing’s 2021 net income × 80% $104,000
 Covenants amortization (13,750 × 80%) (11,000)
 Beginning inventory profit recognition 15,000
 Ending inventory profit deferral (100%) (18,000)

 Equity in Smashing’s earnings 90,000


 2021 dividends (36,000
 Investment balance 12/31/21 $1,100,000

 18. (continued)

 b. 12/31/21 Worksheet Adjustments

 *G Investment in Smashing 15,000
 Cost of goods sold 15,000

 S Common stock—Smashing 700,000

 Retained earnings—Smashing 365,000


 Investment in Smashing 852,000
 Noncontrolling interest 213,000

 A Covenants 261,250

 Investment in Smashing 209,000


 Noncontrolling interest 52,250

 I Equity in earnings of Smashing 90,000
 Investment in Smashing 90,000

 D Investment in Smashing 36,000
 Dividends declared 36,000

 E Amortization expense 13,750
 Covenants 13,750

 TI Sales 120,000
 Cost of goods sold 120,000

 G Cost of goods sold 18,000
 Inventory 18,000
Exercise 21

a. Conversion from Markup on Cost to Gross Profit Rate

Markup (given as a percentage of cost) ....................................... 25%

Convert to gross profit rate [.25  (1.00 + 0.25)]........................... 20%

Noncontrolling Interest's Share of Consolidated Net Income

Reported net income of subsidiary—2021.............................................................................................. $160,000


2020 intra-entity gross profit recognized in 2021
($250,000 × 30% × 20%) ......................................................... 15,000

2021 intra-entity gross profit deferred

($300,000 × 30% × 20%) ......................................................... (18,000

Adjusted net income of subsidiary—2021 ............................... $157,000

Outside ownership ........................................................................ 40%

Net income attributable to noncontrolling interest.................................................................... $ 62,800

b. Entry *G

Retained earnings, Jan. 1 (subsidiary) .............. 15,000

Cost of goods sold .................................................................................... 15,000


To remove intra-entity gross profit from previous year so that it can be
recognized in current year.

Entry Tl

Sales................................................................... 300,000

Cost of goods sold .................................................................................... 300,000


To eliminate intra-entity inventory sale and purchase.

Entry G

Cost of goods sold ............................................. 18,000

Inventory ........................................................................................................... 18,000


To remove effects of current year intra-entity gross profit in inventory.

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