Chapter 7 Solutions

Problem 7-1
Before tax 40% tax After tax
Asset profit – Y Company selling
January 1, Year 2 – sale 45,000 18,000 27,000
Depreciation Year 2 9,000 3,600 5,400
Balance December 31, Year 2 36,000 14,400 21,600
(a)
Depreciation Year 3 9,000 3,600 5,400
(b)
Balance December 31, Year 3 27,000 10,800 16,200

Asset profit – X Company selling

April 30, Year 3 – sale 60,000 24,000 36,000
Depreciation Year 3 (12,000  8/12) 8,000 3,200 4,800
Balance December 31, Year 3 52,000 20,800 31,200
(c)

Investment in Y Company

Balance January 1, Year 2 $ 86,900)

Year 2 transactions:
Increase in Y Company retained earnings
([125,000 – 70,000]  80%) 44,000)
X’s share of changes to acquisition differential * (1,150)
Holdback of Year 2 asset profit (net) ((a) 21,600  80%) (17,280)
Year 3 transactions:
Increase in Y Company retained earnings
([104,000 – 70,000])  80%) 27,200)
Changes to acquisition differential (*) (1,150)
Realization of Year 2 asset profit ((b) 5,400  80%) 4,320)
Holdback of Year 3 asset profit (net) (c) (31,200)
Balance December 31, Year 3 $111,640)
* (86,900 / 80% – 100,000) x 80% / 6 =1,150

Problem 7-2
Equipment gain
Before Tax 40% tax After tax
Year 2 sale – Sally selling 15,000
Depreciation Years 2 and 3 (3,000  2) 6,000
Balance December 31, Year 3 9,000 3,600 5,400
Depreciation Year 4 3,000 1,200 1,800
(a)
Balance December 31, Year 4 6,000 2,400 3,600
(b)

(a) Calculation of consolidated profit attributable to Peggy’s shareholders for Year 4

Profit of Peggy 185,000

Profit of Sally 53,000
Add: Equipment gain realized (a) 1,800
Adjusted profit 54,800
(c)
Consolidated profit 239,800
Attributable to:
Shareholders of Peggy 226,100
NCI (25% x 54,800) 13,700
239,800
(b) Peggy Company
Consolidated Income Statement
Year 4

Revenues (580,000 + 270,000) $850,000

Miscellaneous expense (110,000 + 85,000) 195,000
Depreciation expense (162,000 + 97,000 - (a) 3,000) 256,000
Income tax expense (123,000 + 35,000 + (a) 1,200) 159,200
Total expenses 610,200
Consolidated profit 239,800
Attributable to:
Shareholders of Peggy 226,100
NCI (25% x 54,800) 13,700
239,800

(c) Deferred income taxes - December 31, Year 4 (b) 2,400

Problem 7-3
Intercompany profits – subsidiary selling

Before tax 40% tax After tax

Equipment
Gain on sale, Sept. 30, Year 5 $28,000 $11,200 $16,800
Depreciation Year 5
(28,000 / 5  3/12) 1,400 560 840
(a)
Balance, Dec. 31, Year 5 26,600 10,640 15,960
(b)
Depreciation Year 6 (28,000 / 5) 5,600 2,240 3,360
(c)
Balance, Dec. 31, Year 6 $21,000 $8,400 $12,600

Building
Gain on sale, Jan. 1, Year 6 $59,500 $23,800 $35,700
Depreciation Year 6 (59,500 / 7) 8,500 3,400 5,100
(d)
Balance, Dec. 31, Year 6 $51,000 $20,400 $30,600
(e)

Intercompany Rent
Year 5 (42,000  3/12) $10,500
(f)

Year 6 $42,000
(g)

Calculation of consolidated net income

Year 5 Year 6
Incorrectly reported income $185,000 $269,000
Add: incorrect amount for NCI 45,000 8,160
Incorrect amount for consolidated net income 230,000 277,160
Less: Net unrealized profits
Equipment (b) (15,960)
(h)
Building (e) (30,600)
(i)
Add: equipment profit realized (c) 3,360
(i)
Corrected consolidated net income $214,040 $249,920
Attributable to:
Shareholders of Parent $173,030 $248,570
NCI ((45,000 – (25% × (h) 15,960)) 41,010
NCI ((8,160 – (25% × (i) 27,240)) 1,350
$214,040 $249,920

Parent Company
Corrected Consolidated Income Statements
 Years 5 and 6
Year 5 Year 6
Miscellaneous revenues $875,000 $950,000
Miscellaneous expense 419,800 497,340
Rent expense (70,200 – (f) 10,500) 59,700
(71,800 – (g) 42,000) 29,800
Depreciation expense (100,000 – (a) 1,400) 98,600
(98,200 – (c) 5,600 – (d) 8,500) 84,100
Income tax expense (93,500 – (b) 10,640) 82,860
(107,000 + (c) 2,240 – (e) 20,400) 88,840
Consolidated net income $214,040 $249,920
Attributable to:
Shareholders of Parent $173,030 $248,570
NCI (45,000 – (25% x (h) 15,960)) 41,010
NCI (8,160 – (25% x (i) 27,240)) 1,350
$214,040 $249,920

Problem 7-5
(a) (in 000s) i) ii) iii) iv)
NORD’s own income 200 200 200 200
HABS’s own income 500 500
Less: unrealized profit (500) (500)
HABS’s adjusted income 0 0
Consolidated net income 200
NORD’s ownership 75%
NORD’s share of HABS’s income 0
Dividend income from HABS (75% x 100) 75
NORD’s total income 200 200 275
Consolidated net income attributable to:
NORD’s shareholders 200
NCI (75% x 0) 0
200

(b) (in 000s) i) ii) iii) iv)

HABS’s own income 500 500 500 500
Less: unrealized profit - 500 - 500
HABS’s adjusted income 0 0
Dividend income from NORD (75% x 100) 75
NORD’s own income 200 200
Consolidated net income 200
HABS’s ownership 75%
HABS’s share of NORD’s income . 150 .
HABS’s total income 500 150 575
Consolidated net income attributable to:
HAB’s shareholders 150
NCI (25% x 200) 50
200
(c)
We can make the following observations about the income reported under the different
reporting methods:
1. Net income under the equity method is equal to consolidated net income attributable
to parent’s shareholders because the unrealized profit is eliminated in both situations.
2. The full amount of unrealized profit is eliminated regardless of whether the transaction
is upstream as per part (a) or downstream as per part (b).
3. Unrealized profit is not eliminated under the cost method.
4. Income under cost method will be higher than income under the equity method and
consolidated net income attributable to parent’s shareholders when dividends received
from the investee exceed the investor’s share of the investee’s adjusted net income.

When the parent controls the subsidiary, the consolidated financial statements best reflect
the financial position and results of operations of the combined entities. At the date of
acquisition, the net assets of the subsidiary including goodwill are reported at fair values.
The net assets of the parent are reported at their carrying values. Therefore, the
consolidated financial statements do not reflect the fair value of all assets and liabilities.
However, the assets and liabilities are reported at the values required by generally accepted
accounting principles.

Problem 7-7
(a) Before tax 40% tax After tax
Equipment (Subsidiary selling)
Gain on sale, Jan. 1, Year 5 $240,000 $96,000 $144,000
(a)
Depreciation for January, Year 6
($240,000 / 4 / 12) 5,000 2,000 3,000
(b)
Balance, Jan. 31, Year 6 $235,000 $94,000 $141,000
(c)
Dividends received by Goodkey from Jingya (600,000 x 100%) 600,000
(d)

Goodkey Co.
Consolidated Income Statement
For month ended January 31, Year 5
Sales (10,000,000 + 6,000,000) $16,000,000
Gain on sale of equipment (0 + 240,000 – (a) 240,000) 0
Other income (800,000 + 50,000 – (d) 600,000) 250,000
16,250,000
Depreciation expense (450,000 + 180,000 – (b) 5,000) 625,000
Other expenses (6,600,000 + 4,300,000) 10,900,000
Income tax expense (1,220,000 + 719,000 – (a) 96,000 + (b) 2,000) 1,845,000
13,370,000
Net income $2,880,000
Attributable to:
Shareholders of parent $2,880,000
Non-controlling interest 0

(b)
Everything would be the same except for other income on Goodkey’s separate entity income
statement. Under the equity method, it should exclude the dividends received from Jingya and
should include Goodkey’s share of Jingya’s net income from a consolidated viewpoint, which
is $190,000 calculated as follows:

Jingya’ net income $1,091,000

 Unrealized gain from sale of equipment (c) 141,000
950,000
Goodkey's share x 100%
Equity method income $950,000 (e)
Goodkey’s other income should be (800 – (d) 600 + (e) 950) 1,150,000
Goodkey’s net income will now be $2,880,000 ($2,530,000 – $800,000 + $1,150,000), which
is equal to consolidated net income attributable to Goodkey’s shareholders.

(c)
Everything would remain the same as in part (a) except for the following:
Goodkey’s other income (800 – (d) 600 + 80% x (d) 600) 680,000
Consolidated net income would remain the same at $2,880,000 but it would be attributable
as follows:
Attributable to:
Shareholders of parent (2,880 – 190) $2,690,000
Non-controlling interest ([1,091 – (c) 141] x 20%) 190,000

Problem 7-8
(a)
Acquisition differential – buildings 1,250
(a)
Yearly amortization (25,000 / 20)

Intercompany revenues and expenses

Interest revenue and expense (12,000  ½) 6,000

(b)

Rental revenue and administrative expense 50,000

(c)

Sales and purchases 90,000

(d)
Intercompany profits
Before tax 40% tax After tax
Land gain – M selling
realized in Year 9 10,000 4,000 6,000
(e)

Opening inventory – K selling 12,000 4,800 7,200

(f)

Ending inventory – K selling 5,000 2,000 3,000

(g)

Machinery gain – M selling

realized by depreciation in Year 9
(13,000  5) 2,600 1,040 1,560
(h)

Calculation of non-controlling interest in profit of K Company – Year 9

Income of K 25,500
Add: realized profit in opening inventory (f) 7,200
32,700
Less: Changes to acquisition differential (a) 1,250
Unrealized profit in ending inventory (g) 3,000
Adjusted profit 28,450
Non-controlling interest’s share 20%
Non-controlling interest, Year 9 5,690
(i)

M Co.
Consolidated Income Statement
Year 9
Sales (600,000 + 350,000 – (d) 90,000) $860,000
Interest revenue (6,700 – (b) 6,000) 700
Gain on land sale (8,000 + (e) 10,000) 18,000
Total revenues 878,700
Cost of goods sold
(334,000 + 225,000 – (d) 90,000 – (f) 12,000 + (g) 5,000) 462,000
Distribution expense (80,000 + 70,000 – (h) 2,600 + (a) 1,250) 148,650
Administrative expense (147,000 + 74,000 – (c) 50,000) 171,000
Interest expense (1,700 + 6,000 – (b) 6,000) 1,700
Income tax expense
(20,700 + 7,500 + (e) 4,000 + (f) 4,800 – (g) 2,000 + (h) 1,040) 36,040
Total expenses 819,390
Profit 59,310
Attributable to:
Shareholders of M 53,620
Non-controlling interest (i) 5,690
$ 59,310

(b)
M Co.
Income Statement
December 31, Year 9
Sales $600,000
Interest revenue 6,700
Dividend income from subsidiary (20,000 x 80%) 16,000
622,700
Cost of goods sold 334,000
Distribution expense 80,000
Administrative expense 147,000
Interest expense 1,700
Income tax expense 20,700
583,400
Profit $ 39,300

Problem 7-10
Calculation, allocation, and changes to acquisition differential

Cost of 80% investment in Spruce Ltd., Jan. 2, Year 4 2,000,000

Implied value of 100% 2,500,000
Carrying amounts of Spruce's net assets:
Common shares 500,000
Retained earnings 1,250,000
Total shareholders' equity 1,750,000
Acquisition differential 750,000
Allocation: FV – CA
Mineral rights 750,000
Balance 0

Balance Changes Balance

Jan. 1/4 Years 4 to 6 Year 7 Dec. 31/7

Mineral rights 750,000 (a) (225,000) (b) (75,000) 450,000

(c)
Intercompany sales and purchases 1,000,000
(d)

Intercompany profits

Before tax 40% tax After tax

Equipment Jan. 2/5 – Poplar selling
(500,000 – 400,000) 100,000
(e)
Depreciation Years 5 and 6 40,000
Balance, Dec. 31, Year 6 60,000 24,000 36,000
(f)
Depreciation, Year 7 20,000 8,000 12,000
(g)
Balance, Dec. 31, Year 7 40,000 16,000 24,000
(h)

Inventory Jan. 1, Year 7 – Spruce selling 200,000 80,000 120,000

(i)
Inventory Dec. 31, Year 7 – Spruce selling 105,000 42,000 63,000
(j)

Spruce’s accumulated depreciation, date of acquisition 600,000

(k)

Deferred income tax – Dec. 31, Year 7

Equipment (h) 16,000

Inventory (j) 42,000
Deferred income tax asset 58,000
(l)

Calculation of consolidated net income – Year 7

Income of Poplar 1,100,000

Less: Dividend from Spruce (250,000  80%) 200,000
Equipment profit realized (g) 12,000

Adjusted net income 912,000

Income of Spruce 521,500
Less: Changes to acquisition differential (b) 75,000
Unrealized profit in closing inventory (j) 63,000
383,500
Add: Realized profit in opening inventory (i) 120,000
Adjusted net income 503,500
(m)
Consolidated net income 1,415,500
Attributable to:
Shareholders of Poplar 1,314,800
NCI (20% x 503,500) 100,700
1,415,500

(a) (i) Poplar Ltd.

Consolidated Income Statement
 Year 7

Sales (4,900,000 + 2,000,000 – 1,000,000 (d)) 5,900,000

Interest revenue (0 + 21,500) 21,500
Total revenues 5,921,500
Cost of goods sold
(2,400,000 + 850,000 – (d) 1,000,000 – (i) 200,000 + (j) 105,000) 2,155,000
Other expenses (962,000 + 300,000 + (b) 75,000 – (g) 20,000) 1,317,000
Interest expense (38,000 + 0) 38,000
Income tax expense
(600,000 + 350,000 + (i) 80,000 – (j) 42,000 + (g) 8,000) 996,000
Total expenses 4,506,000
Net income 1,415,500
Attributable to:
Shareholders of Poplar 1,314,800
NCI (20% x 503,500) 100,700
1,415,500

Calculation of consolidated retained earnings – Jan. 1, Year 7

Retained earnings of Poplar, Jan. 1, Year 7 10,000,000
Less: Unrealized profit in equipment (f) 36,000
9,964,000
Retained earnings of Spruce, Jan. 1, Year 7 2,000,000
At acquisition 1,250,000
Increase 750,000
Less: Change in acquisition differential (a) 225,000
Unrealized profit in opening inventory (i) 120,000
Adjusted increase 405,000
(n)
Poplar's ownership % 80% 324,000
Consolidated retained earnings, Jan. 1 Year 7 10,288,000

(ii) Poplar Ltd.

Consolidated Statement of Retained Earnings
 Year 7

Retained earnings, Jan. 1, Year 7 $10,288,000

Add: net income 1,314,800
11,602,800
Less: dividends 600,000
Retained earnings, Dec. 31, Year 7 $11,002,800

Calculation of non-controlling interest – Dec. 31, Year 7

Common shares of Spruce 500,000)

Retained earnings of Spruce, Jan. 1, Year 7 2,000,000)
Net income, Year 7 521,500)
Dividends, Year 7 (250,000)
Total shareholders' equity, Dec. 31, Year 7 2,771,500)
Less: Unrealized profit in ending inventory (j) 63,000)
2,708,500)
Add: Undepleted acquisition differential (c) 450,000
Adjusted shareholders' equity, Spruce 3,158,500)
Non-controlling interest’s share 20%
Non-controlling interest, Dec. 31, Year 7 631,700)

(iii) Poplar Ltd.

Consolidated Balance Sheet
Dec. 31, Year 7
Cash (1,000,000 + 500,000) 1,500,000)
Accounts receivable (2,000,000 + 356,000) 2,356,000)
Inventory (3,000,000 + 2,006,000 – (j) 105,000) 4,901,000)
Plant and equipment (14,000,000 + 2,900,000 – (e) 100,000 – (k) 600,000) 16,200,000)
Accumulated depreciation (4,000,000 + 1,000,000 – (f) 60,000 – (k) 600,000) (4,340,000)
Investment in bonds 488,000
Mineral rights (c) 450,000)
Deferred income taxes (l) 58,000)
Total assets 21,613,000)
Accounts payable (2,492,000 + 2,478,500) 4,970,500
Bonds payable (500,000 + 0) 500,000
Premium on bonds payable (8,000 + 0) 8,000
Common shares 4,500,000
Retained earnings 11,002,800
Non-controlling interest 631,700
Total liabilities and shareholders' equity 21,613,000

(b) Investment Account, Dec. 31, Year 7 - Equity Method

Balance, Dec. 31, Year 7 – cost method 2,000,000

Less: Unrealized profit in equipment (h) 24,000
1,976,000
Add: Adjusted increase in Spruce's retained earnings to
Jan. 1, Year 7 (n) 405,000
Poplar's ownership % 80% 324,000
2,300,000
Add: Adjusted income of Spruce, Year 7 (m) 503,500
Poplar's ownership % 80% 402,800
2,702,800
Less: Dividend from Spruce (250,000  80%) 200,000
Balance, Dec. 31, Year 7 2,502,800

Alternative calculation:
Consolidated retained earnings, Dec. 31, Year 7 11,002,800
Retained earnings – Poplar Dec. 31, Year 7 – cost
method (10,000,000 + 1,100,000 – 600,000) 10,500,000
Difference 502,800
Investment in Spruce – cost method 2,000,000
Investment in Spruce – equity method, Dec. 31, Year 7 2,502,800

(c)
Gains should be recognized when they are realized i.e., when there has been a transaction
with outsiders and consideration has been given/received. When the parent acquires the
subsidiary’s bonds for cash in the open market, it is transacting with an outsider and giving
cash as consideration. From the separate entity perspective, the parent is investing in bonds.
However, from a consolidated point of view, the parent is retiring the bonds of the subsidiary
when it purchases the bonds from the outside entity. Therefore, when the investment in bonds
is offset against the bonds payable on consolidation, any difference in the carrying amounts
is recorded as a gain or loss on the deemed retirement of the bonds.

Problem 7-17
Calculation, allocation, and changes to acquisition differential

Cost of 70% investment in Dandy $13,300

Implied value of 100% $19,000
Carrying amounts of Dandy’s net assets:
Common shares $1,250
Retained earnings 6,500
Total shareholders' equity 7,750
Acquisition differential, Jan. 1, Year 4 11,250
Allocation: FV – CA
Inventory $100
Equipment 500 600
Balance – Goodwill $10,650

Changes
Balance Balance
Jan. 1/4 Years 4 to 8 Year 9 Dec. 31/9
Inventory $100 $(100) - -
Equipment (10-year life) 500 (250) $(50) $200 (a)
Goodwill 10,650 (9,350) (190) 1,110 (b)
$11,250 $(9,700) $(240) $1,310 (c)

Intercompany profits
 Before tax 40% tax After tax

Opening inventory – Dandy selling (3,400 x 50%) $1,700 $680 $1,020 (d)

Closing inventory – Dandy selling (4,500 x 50%) $2,250 $900 $1,350(e)

Gain on equipment Jan. 1/5 – Handy selling $360 (f)
Depreciation to Dec. 31, Year 8 ([360 / 8]  4) 180
Balance, Dec. 31, Year 8 $180 $72 $108 (g)
Depreciation Year 9 (360  8) 45 18 27 (h)
Balance, Dec. 31, Year 9 $135 $54 $81 (i)

Intercompany revenues and expenses, receivables and payables

Sales and purchases $5,900 (j)
Consulting revenues and expenses (50 x 12) $600 (k)

Deferred income taxes (Dec. 31, Year 9)

Inventory (e) $900
Equipment (i) 54 $954 (l)

Calculation of consolidated net income – Year 9

Income of Handy $1,960
Less: Dividends from Dandy (980  70%) (m) 686
1,274
Add: Realized gain on equipment (h) 27
Adjusted net income 1,301
Income of Dandy $1,060
Add: Realized profit in opening inventory (d) 1,020
Less: Changes to acquisition differential (c) (240)
Unrealized profit in closing inventory (e) (1,350)
Adjusted net income 490
Consolidated net income $1,791
Attributable to:
Shareholders of Handy $1,644
NCI (30% x 490) 147
 $1,791

(a) Handy Company

Consolidated Income Statement
Year 9

Sales (22,900 + 8,440 – (j) 5,900) $25,440

Cost of sales (15,200 + 3,680 – (j) 5,900 + (e) 2,250 – (d) 1,700) 13,530
Gross profit 11,910
Other revenue (1,820 + 0 – (m) 686 – (k) 600) 534
Selling & admin expense (1,040 + 620 + (a) 50 – (h) 45) (1,665)
Other expenses (5,520 + 2,240 + (b) 190 – (k) 600) (7,350)
Income before income taxes 3,429
Income tax expense (1,000 + 840 + (d) 680 – (e) 900 + (h) 18) 1,638
Net income $1,791
Attributable to:
Shareholders of Handy 1,644
NCI (30% x 490) 147
$1,791

(b)
Calculation of consolidated retained earnings – Jan. 1, Year 9
Handy’s retained earnings $10,620
Unrealized gain on sale of equipment (g) (108)
Subtotal 10,512
Dandy’s retained earnings, beginning of Year 9 $7,050
Dandy’s retained earnings, at acquisition 6,500
Change in retained earnings since acquisition 550
Cumulative differential amortization and impairment (c) (9,700)
Unrealized profit in beginning inventory (d) (1,020)
(10,170)
Handy’s share @ 70% (7,119)
Consolidated retained earnings $3,393
 Handy Company
Consolidated Statement of Retained Earnings
For the year ended December 31, Year 9

Retained earnings, beginning of year $3,393

Add: Net income 1,644
5,037
Less: Dividends paid (1,960)
Retained earnings, end of year $3,077

(c) When unrealized profit is eliminated from the carrying value of the equipment, the
equipment ends up being reported at the original cost of the equipment less
accumulated amortization based on the original cost, as if the intercompany transaction
had never taken place. So, in effect, the equipment is reported at its historical cost.

(d) Goodwill impairment loss under fair value enterprise method $190
Less: NCI’s share (30%) 57
Goodwill impairment loss under identifiable net assets method $133

NCI on income statement under fair value enterprise method $147

Add: NCI’s share of goodwill impairment (30%) 57
NCI on income statement under identifiable net assets method $204

(e) See below for summary of journal entries.

 CONSOLIDATED FINANCIAL STATEMENT WORKING PAPER
HANDY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, YEAR 9
Eliminations
Handy Dandy Dr. Cr. Consolidated
Year 9 income statements
Sales $ 22,900 $8,440 7 $ 5,900 $ - $ 25,440
Cost of sales 15,200 3,680 9 2,250 7 5,900 13,530
8 1,700
Gross profit 7,700 4,760 11,910

Other revenue 1,820 0 5 686 534

6 600

Selling and administrative expense 1,040 620 4 50 11 45 1,665

Other expenses 5,520 2,240 4 190 6 600 7,350
Income before income taxes 2,960 1,900 3,429
Income tax expense 1,000 840 8 680 9 900 1,638
11 18
Profit $ 1,960 $1,060 $ 1,791
Attributable to
Non-controlling interest 12 147 $ 147
Shareholders of Handy 1,644
Total $ 10,521 $ 9,145
Year 9 retained earnings statements
Balance, January 1 $ 10,620 $ 7,050 1 $ 7,227 $ - $ 3,393
3 7,050
Profit 1,960 1,060 Above 10,521 9,145 1,644
12,580 8,110 5,037
Dividends 1,960 980 5 686 1,960
 13 294
Balance, December 31 $ 10,620 $ 7,130 $ 3,077
Total $ 24,798 $ 10,125

Balance Sheet, December 31, Year 9

Cash $ 1,540 $ 980 $ - $ - $ 2,520
Accounts receivable 3,000 1,250 4,250
Inventory 3,600 4,250 9 2,250 5,600

Property, plant, and equipment—net 4,540 3,210 3 250 4 50 7,815

11 45 10 180
Goodwill 3 1,300 4 190 1,110
Deferred income tax asset 9 900 11 18 954
10 72
Investment in Dandy 13,300 0 2 2,649 1 7,227 (0)
8 1,020 3 9,850
10 108
Total $ 25,980 $ 9,690 $ 22,249
Current liabilities $ 4,560 $ 680 0 0 $ 5,240
Long-term liabilities 3,300 630 3,930
Common shares 7,500 1,250 3 1,250 7,500
Retained earnings 10,620 7,130 Above 24,798 10,125 3077
Non-controlling interest 13 294 2 2,649 2502
12 147
Total $ 25,980 $ 9,690 $ 22,249
$ 32,686 $ 32,686
Journal Entries
1 Retained earnings (note a) 7,227
Investment in Dandy 7,227
To adjust retained earnings to equity method at beginning of year

2 Investment in Dandy 2,649

Non-controlling interest (note b) 2,649
To establish non-controlling interest at beginning of year

3 Common shares 41,250

Retained earnings 7,050
Equipment 250
Goodwill 1,300
Investment in Dandy 9,850
To eliminate subsidiary's shareholders' equity and
establish acquisition differential at beginning of Year 9

4 Goodwill impairment 190

Goodwill 190
Amortization expense 50
Property, plant & equipment – net 50
To record changes to acquisition differential for Year 9

5 Dividend income 686

Dividends paid 686
To eliminate dividends from subsidiary

6 Other revenue 600

Other expenses 600
To eliminate consulting revenue and expenses

7 Sales 5,900
Cost of sales 5,900
To eliminate intercompany sales

8 Investment in Handy 1,020

Cost of sales 1,700
Income tax expense 680
To eliminate unrealized profits in beginning inventory

9 Cost of sales 2,250

Inventory 2,250
Deferred income tax asset 900
Income tax expenses 900
To eliminate unrealized profits in ending inventory

10 Investment in Handy 108

Deferred income tax asset 72
Equipment - net 180
To eliminate intercompany gain on sale of equipment at beginning of Year 9
11 Equipment - net 45
Depreciation expense 45
Income tax expense 18
Deferred income tax asset 18
To eliminate excess depreciation from intercompany gain on sale of equipment

12 Non-controlling interest-P&L 147

Non-controlling interest-SFP 147
To record NCI's share of income for the year

13 Non-controlling interest-SFP 294

Dividends paid (30% x 980) 294
To record NCI's share of dividends paid

Total of debits and credits $ 32,686 $ 32,686

Notes
a Consolidated retained earnings, beginning of Year 9
(= Handy's retained earnings, beginning of Year 9 under equity
method) $ 3,393
Handy's retained earnings, beginning of Year 9 under cost method 10,620
Difference between cost and equity method, beginning of Year 9 $ (7,227)

b Dandy's common shares $ 1,250

Dandy's retained earnings 7,130
Undepleted acquisition differential 1,310
Ending inventory (1,350)
Dandy's adjusted shareholders' equity 8,340
NCI's share 30%
NCI, end of Year 9 2,502
Less: NCI's share of consolidated net income for Year 9 -147
Add: NCI's share of Dandy's dividends for Year 9 294
NCI, beginning of Year 9 $ 2,649