On January 1, 2017, Lime Inc. acquired 80,000 common shares of Stone Corp. for $900,000. On January 1, 2017 Stone's balance sheet showed the following shareholders' equity: $ 3 cumulative preferred shares, 20 , 000 shares issued $ 120 , 000 Common shares, 100 , 000 shares issued $ 600 , 000 Surplus (Deficit) ( $ 10 , 000 ) ∗ $ 710 , 000 \begin{array}{|l|r|}\hline\$ 3 ext { cumulative preferred shares, } 20,000 ext { shares issued } & \$ 120,000 \\hline ext { Common shares, } 100,000 ext { shares issued } & \$ 600,000 \\hline ext { Surplus (Deficit) } & (\$ 10,000)^{*} \\hline & \$710,000\\hline\end{array} $3 cumulative preferred shares, 20 , 000 shares issued Common shares, 100 , 000 shares issued Surplus (Deficit) $120 , 000 $600 , 000 ( $10 , 000 ) ∗ $710 , 000 * Stone's preferred share dividends were one year in arrears on that date.Stone's fair values approximated its book values on that date with the following exceptions:  Inventory had a fair value that was $30,000 higher than its book value. Plant and equipment had a fair value $10,000 lower than their book value.  The plant and equipment had an estimated remaining useful life of 10 years from the date of acquisition.The financial statements of Lime Inc. and its subsidiary Stone Corp. on December 31, 2020 are shown below: LIME Inc. STONE Corp. RETAINED EARNINGS STATEMENTS Balance, January 1, 2020 $ 200 , 000 $ 370 , 000 Net Income $ 350 , 000 $ 222 , 000 Less: dividends ( $ 25 , 000 ) ( $ 100 , 000 ) Retained earnings $ 525 , 000 $ 492 , 000 BALANCE SHEETS Cash $ 120 , 000 $ 3 , 000 Accounts receivable $ 270 , 000 $ 255 , 000 Inventory $ 165 , 000 $ 144 , 000 Land $ 210 , 000 Plant and equipment $ 1 , 200 , 000 $ 2 , 100 , 000 Accumulated depreciation ( $ 690 , 000 ) ( $ 900 , 000 ) Investment in Stone (common) $ 900 , 000 Total Assets $ 2 , 175 , 000 $ 1 , 602 , 000 Accounts payable $ 276 , 000 $ 330 , 000 Accrued liabilities $ 24 , 000 $ 30 , 000 Preferred shares $ 150 , 000 Common shares $ 1 , 350 , 000 $ 600 , 000 Retained earnings $ 525 , 000 $ 492 , 000 Total Liabilities and Equity $ 2 , 175 , 000 $ 1 , 602 , 000 \begin{array}{|l|r|r|}\hline & ext { LIME Inc. } & ext { STONE Corp. } \\hline ext { RETAINED EARNINGS } & & \ ext { STATEMENTS } & & \\hline ext { Balance, January 1, 2020 } & \$ 200,000 & \$ 370,000 \\hline ext { Net Income } & \$ 350,000 & \$ 222,000 \\hline ext { Less: dividends } & (\$ 25,000) & (\$ 100,000) \\hline ext { Retained earnings } & \$ 525,000 & \$ 492,000 \\hline ext { BALANCE SHEETS } & & \\hline ext { Cash } & \$ 120,000 & \$ 3,000 \\hline ext { Accounts receivable } & \$ 270,000 & \$ 255,000 \\hline ext { Inventory } & \$ 165,000 & \$ 144,000 \\hline ext { Land } & \$ 210,000 & \\hline ext { Plant and equipment } & \$ 1,200,000 & \$ 2,100,000 \\hline ext { Accumulated depreciation } & (\$ 690,000) & (\$ 900,000) \\hline ext { Investment in Stone (common) } & \$ 900,000 & \\hline ext { Total Assets } & \$ 2,175,000 & \$ 1,602,000 \\hline ext { Accounts payable } & \$ 276,000 & \$ 330,000 \\hline ext { Accrued liabilities } & \$ 24,000 & \$ 30,000 \\hline ext { Preferred shares } & & \$ 150,000 \\hline ext { Common shares } & \$ 1,350,000 & \$ 600,000 \\hline ext { Retained earnings } & \$ 525,000 & \$ 492,000 \\hline ext { Total Liabilities and Equity } & \$ 2,175,000 & \$ 1,602,000 \\hline\end{array} RETAINED EARNINGS STATEMENTS Balance, January 1, 2020 Net Income Less: dividends Retained earnings BALANCE SHEETS Cash Accounts receivable Inventory Land Plant and equipment Accumulated depreciation Investment in Stone (common) Total Assets Accounts payable Accrued liabilities Preferred shares Common shares Retained earnings Total Liabilities and Equity LIME Inc. $200 , 000 $350 , 000 ( $25 , 000 ) $525 , 000 $120 , 000 $270 , 000 $165 , 000 $210 , 000 $1 , 200 , 000 ( $690 , 000 ) $900 , 000 $2 , 175 , 000 $276 , 000 $24 , 000 $1 , 350 , 000 $525 , 000 $2 , 175 , 000 STONE Corp. $370 , 000 $222 , 000 ( $100 , 000 ) $492 , 000 $3 , 000 $255 , 000 $144 , 000 $2 , 100 , 000 ( $900 , 000 ) $1 , 602 , 000 $330 , 000 $30 , 000 $150 , 000 $600 , 000 $492 , 000 $1 , 602 , 000 Other Information:  Intercompany sales of inventory for 2020 were as follows: Lime to Stone: $ 50 , 000 Stone to Lime: $ 40 , 000 \begin{array}{|l|l|}\hline ext { Lime to Stone: } & \$ 50,000 \\hline ext { Stone to Lime: } & \$ 40,000\\hline\end{array} Lime to Stone: Stone to Lime: $50 , 000 $40 , 000  Unrealized intercompany profits in inventory for 2020 were as follows: January 1, 2020: Stone’s Inventory $ 10 , 000 Lime’s Inventory $ 20 , 000 December 31,2020: Stone’s Inventory $ 6 , 000 Lime’s Inventory $ 8 , 000 \begin{array}{|c|cc|}\hline ext { January 1, 2020: } & \\hline ext { Stone ' s Inventory } & \$ 10,000 \\hline ext { Lime ' s Inventory } & \$ 20,000 \\hline ext { December 31,2020: } & \\hline ext { Stone ' s Inventory } & \$ 6,000 \\hline ext { Lime ' s Inventory } & \$ 8,000\\hline\end{array} January 1, 2020: Stone’s Inventory Lime’s Inventory December 31,2020: Stone’s Inventory Lime’s Inventory $10 , 000 $20 , 000 $6 , 000 $8 , 000  On January 1, 2018, Stone sold equipment to Lime for $30,000. The equipment had a carrying value of $27,000 on that date and an estimated useful life of 3 years. The inventory on hand at the start of 2020 was sold to outsiders during the year.  Both companies are subject to a tax rate of 40%. There were no dividends in arrears on December 31, 2019. Lime uses the cost method to account for its investment in Stone.Compute the Consolidated Net Income for 2020 and show its allocation between the controlling and non-controlling interests. Do not prepare an Income Statement.

Question

On January 1, 2017, Lime Inc. acquired 80,000 common shares of Stone Corp. for $900,000. On January 1, 2017 Stone's balance sheet showed the following shareholders' equity: $ 3  cumulative preferred shares,  20 , 000  shares issued  $ 120 , 000  Common shares,  100 , 000  shares issued  $ 600 , 000  Surplus (Deficit)  ( $ 10 , 000 ) ∗ $ 710 , 000 \begin{array}{|l|r|}\hline\$ 3 	ext { cumulative preferred shares, } 20,000 	ext { shares issued }  &  \$ 120,000 \\hline 	ext { Common shares, } 100,000 	ext { shares issued }  &  \$ 600,000 \\hline 	ext { Surplus (Deficit) }  &  (\$ 10,000)^{*} \\hline & \$710,000\\hline\end{array} $3  cumulative preferred shares,  20 , 000  shares issued   Common shares,  100 , 000  shares issued   Surplus (Deficit)  ​ $120 , 000 $600 , 000 ( $10 , 000 ) ∗ $710 , 000 ​ ​   * Stone's preferred share dividends were one year in arrears on that date.Stone's fair values approximated its book values on that date with the following exceptions:   Inventory had a fair value that was $30,000 higher than its book value. Plant and equipment had a fair value $10,000 lower than their book value.   The plant and equipment had an estimated remaining useful life of 10 years from the date of acquisition.The financial statements of Lime Inc. and its subsidiary Stone Corp. on December 31, 2020 are shown below:  LIME Inc.   STONE Corp.   RETAINED EARNINGS   STATEMENTS   Balance, January 1, 2020  $ 200 , 000 $ 370 , 000  Net Income  $ 350 , 000 $ 222 , 000  Less: dividends  ( $ 25 , 000 ) ( $ 100 , 000 )  Retained earnings  $ 525 , 000 $ 492 , 000  BALANCE SHEETS   Cash  $ 120 , 000 $ 3 , 000  Accounts receivable  $ 270 , 000 $ 255 , 000  Inventory  $ 165 , 000 $ 144 , 000  Land  $ 210 , 000  Plant and equipment  $ 1 , 200 , 000 $ 2 , 100 , 000  Accumulated depreciation  ( $ 690 , 000 ) ( $ 900 , 000 )  Investment in Stone (common)  $ 900 , 000  Total Assets  $ 2 , 175 , 000 $ 1 , 602 , 000  Accounts payable  $ 276 , 000 $ 330 , 000  Accrued liabilities  $ 24 , 000 $ 30 , 000  Preferred shares  $ 150 , 000  Common shares  $ 1 , 350 , 000 $ 600 , 000  Retained earnings  $ 525 , 000 $ 492 , 000  Total Liabilities and Equity  $ 2 , 175 , 000 $ 1 , 602 , 000 \begin{array}{|l|r|r|}\hline  &  	ext { LIME Inc. }  &  	ext { STONE Corp. } \\hline 	ext { RETAINED EARNINGS }  &   &  \	ext { STATEMENTS }  &   &  \\hline 	ext { Balance, January 1, 2020 }  &  \$ 200,000  &  \$ 370,000 \\hline 	ext { Net Income }  &  \$ 350,000  &  \$ 222,000 \\hline 	ext { Less: dividends }  &  (\$ 25,000)  &  (\$ 100,000) \\hline 	ext { Retained earnings }  &  \$ 525,000  &  \$ 492,000 \\hline 	ext { BALANCE SHEETS }  &   &  \\hline 	ext { Cash }  &  \$ 120,000  &  \$ 3,000 \\hline 	ext { Accounts receivable }  &  \$ 270,000  &  \$ 255,000 \\hline 	ext { Inventory }  &  \$ 165,000  &  \$ 144,000 \\hline 	ext { Land }  &  \$ 210,000  &  \\hline 	ext { Plant and equipment }  &  \$ 1,200,000  &  \$ 2,100,000 \\hline 	ext { Accumulated depreciation }  &  (\$ 690,000)  &  (\$ 900,000) \\hline 	ext { Investment in Stone (common) }  &  \$ 900,000  &  \\hline 	ext { Total Assets }  &  \$ 2,175,000  &  \$ 1,602,000 \\hline 	ext { Accounts payable }  &  \$ 276,000  &  \$ 330,000 \\hline 	ext { Accrued liabilities }  &  \$ 24,000  &  \$ 30,000 \\hline 	ext { Preferred shares }  &   &  \$ 150,000 \\hline 	ext { Common shares }  &  \$ 1,350,000  &  \$ 600,000 \\hline 	ext { Retained earnings }  &  \$ 525,000  &  \$ 492,000 \\hline 	ext { Total Liabilities and Equity }  &  \$ 2,175,000  &  \$ 1,602,000 \\hline\end{array}  RETAINED EARNINGS   STATEMENTS   Balance, January 1, 2020   Net Income   Less: dividends   Retained earnings   BALANCE SHEETS   Cash   Accounts receivable   Inventory   Land   Plant and equipment   Accumulated depreciation   Investment in Stone (common)   Total Assets   Accounts payable   Accrued liabilities   Preferred shares   Common shares   Retained earnings   Total Liabilities and Equity  ​  LIME Inc.  $200 , 000 $350 , 000 ( $25 , 000 ) $525 , 000 $120 , 000 $270 , 000 $165 , 000 $210 , 000 $1 , 200 , 000 ( $690 , 000 ) $900 , 000 $2 , 175 , 000 $276 , 000 $24 , 000 $1 , 350 , 000 $525 , 000 $2 , 175 , 000 ​  STONE Corp.  $370 , 000 $222 , 000 ( $100 , 000 ) $492 , 000 $3 , 000 $255 , 000 $144 , 000 $2 , 100 , 000 ( $900 , 000 ) $1 , 602 , 000 $330 , 000 $30 , 000 $150 , 000 $600 , 000 $492 , 000 $1 , 602 , 000 ​ ​   Other Information:   Intercompany sales of inventory for 2020 were as follows:  Lime to Stone:  $ 50 , 000  Stone to Lime:  $ 40 , 000 \begin{array}{|l|l|}\hline 	ext { Lime to Stone: }  &  \$ 50,000 \\hline 	ext { Stone to Lime: }  &  \$ 40,000\\hline\end{array}  Lime to Stone:   Stone to Lime:  ​ $50 , 000 $40 , 000 ​ ​      Unrealized intercompany profits in inventory for 2020 were as follows:  January 1, 2020:   Stone’s Inventory  $ 10 , 000  Lime’s Inventory  $ 20 , 000  December 31,2020:   Stone’s Inventory  $ 6 , 000  Lime’s Inventory  $ 8 , 000 \begin{array}{|c|cc|}\hline 	ext { January 1, 2020: }  &  \\hline 	ext { Stone ' s Inventory }  &  \$ 10,000 \\hline 	ext { Lime ' s Inventory }  &  \$ 20,000 \\hline 	ext { December 31,2020: }  &  \\hline 	ext { Stone ' s Inventory }  &  \$ 6,000 \\hline 	ext { Lime ' s Inventory }  &  \$ 8,000\\hline\end{array}  January 1, 2020:   Stone’s Inventory   Lime’s Inventory   December 31,2020:   Stone’s Inventory   Lime’s Inventory  ​ $10 , 000 $20 , 000 $6 , 000 $8 , 000 ​ ​      On January 1, 2018, Stone sold equipment to Lime for $30,000. The equipment had a carrying value of $27,000 on that date and an estimated useful life of 3 years. The inventory on hand at the start of 2020 was sold to outsiders during the year.   Both companies are subject to a tax rate of 40%. There were no dividends in arrears on December 31, 2019. Lime uses the cost method to account for its investment in Stone.Compute the Consolidated Net Income for 2020 and show its allocation between the controlling and non-controlling interests. Do not prepare an Income Statement.

Layken Alber · Accepted Answer

Final Answer :   Lime’s  2020  Net income  $ 350 , 000  Less: Intercompany dividends  $ ( 32 , 000 )  Add: Realized profits from opening inventory   (downstream)  $ 6 , 000  Less: Unrealized profits in ending inventory   (downstream)  ( $ 3 , 600 )  Stone’s Net income  $ 222 , 000  Add: Amortization of acquisition differential  ( $ 10 , 000 ) / 10  years  $ 1 , 000  Realized from opening inventory (upstream)  $ 12 , 000  Unrealized in ending inventory (upstream)  ( $ 4 , 800 )  Realized from equipment sale  $ 3 , 000 / 3  years-  $ 1 , 000  per year  $ 600 $ 230 , 800  Consolidated Net Income  $ 551 , 200  Non-controlling interest:   Preferred shares  $ 60 , 000  Common shares  ( 20 %  of  [ $ 230 , 800 − $ 60 , 000 ] ) $ 34 , 160 $ 94 , 160  Controlling interest  ( $ 551 , 200 − $ 94 , 160 ) $ 457 , 040 $ 551 , 200 \begin{array}{|l|r|r|}\hline \text { Lime ' s } 2020 \text { Net income }  &   &  \$ 350,000 \\hline \text { Less: Intercompany dividends }  & &  \$ (32,000) \\hline \begin{array}{l}\text { Add: Realized profits from opening inventory } \\text { (downstream) }\end{array}  & &  \$ 6,000 \\hline \begin{array}{l}\text { Less: Unrealized profits in ending inventory } \\text { (downstream) }\end{array} &   &  (\$ 3,600) \\hline \text { Stone ' s Net income }  &  \$ 222,000 \\hline \begin{array}{l}\text { Add: Amortization of acquisition differential } \(\$ 10,000) / 10 \text { years }\end{array}  &  \$ 1,000 \\hline \text { Realized from opening inventory (upstream) }  &  \$ 12,000 \\hline \text { Unrealized in ending inventory (upstream) }  &  (\$ 4,800) \\hline \begin{array}{l}\text { Realized from equipment sale } \$ 3,000 / 3 \text { years- } \\$ 1,000 \text { per year }\end{array}  &  \$ 600  &  \$ 230,800 \\hline \text { Consolidated Net Income }  &   &  \$ 551,200 \\hline \text { Non-controlling interest: }  &  \\hline \text { Preferred shares }  &  \$ 60,000 \\hline \text { Common shares }  &  \\hline(20 \% \text { of }[\$ 230,800-\$ 60,000])  &  \$ 34,160 \\hline  &   &  \$ 94,160 \\hline \text { Controlling interest }(\$ 551,200-\$ 94,160)  &   &  \$ 457,040 \\hline  &   &  \$ 551,200 \\hline\end{array}  Lime’s  2020  Net income   Less: Intercompany dividends   Add: Realized profits from opening inventory   (downstream)  ​  Less: Unrealized profits in ending inventory   (downstream)  ​  Stone’s Net income   Add: Amortization of acquisition differential  ( $10 , 000 ) /10  years  ​  Realized from opening inventory (upstream)   Unrealized in ending inventory (upstream)   Realized from equipment sale  $3 , 000/3  years-  $1 , 000  per year  ​  Consolidated Net Income   Non-controlling interest:   Preferred shares   Common shares  ( 20%  of  [ $230 , 800 − $60 , 000 ])  Controlling interest  ( $551 , 200 − $94 , 160 ) ​ $222 , 000 $1 , 000 $12 , 000 ( $4 , 800 ) $600 $60 , 000 $34 , 160 ​ $350 , 000 $ ( 32 , 000 ) $6 , 000 ( $3 , 600 ) $230 , 800 $551 , 200 $94 , 160 $457 , 040 $551 , 200 ​ ​  Undepleted   Changes   Balance Dec. 31,   Changes 2020   Balance Dec. 31,   Acquisition  2017 − 2019 2019 2020  Differential   Jan. 1, 2017   Plant  &    Equipment  ( $ 10 , 000 ) $ 3 , 000 ( 10  years SL)  ( $ 7 , 000 ) $ 1 , 000 ( $ 6 , 000 )  Inventory  $ 30 , 000 ( $ 30 , 000 ) − − −  Goodwill  $ 575 , 000 ⋯ ⋯ − ⋅ $ 575 , 000 $ 575 , 0000  Total  $ 595 , 000 ( $ 27 , 000 ) $ 568 , 000 $ 1 , 000 $ 569 , 000 \begin{array}{|r|r|r|r|r|r|}\hline  & \text { Undepleted }  &  \text { Changes }  &  \text { Balance Dec. 31, }  &  \text { Changes 2020 }  &  \text { Balance Dec. 31, } \ & \text { Acquisition }  &  2017-2019  &  2019  & &  2020 \ & \text { Differential }  &   &   &  \ & \text { Jan. 1, 2017 }  &   &   &  \\hline \begin{array}{l}\text { Plant \ &  } \\text { Equipment }\end{array}  &  (\$ 10,000)  &  \begin{array}{c}\$ 3,000(10 \\text { years SL) }\end{array}  & (\$7,000) & \$1,000 & (\$6,000)\\hline \text { Inventory }  &  \$ 30,000  &  (\$ 30,000)  & - & - & -\\hline \text { Goodwill }  &  \$ 575,000  &  \cdots \cdots-\cdot  & \$575,000 & & \$575,0000\\hline\text { Total } & \$595,000 & (\$27,000) & \$568,000 & \$1,000 & \$569,000\\hline\end{array}  Plant  &    Equipment  ​  Inventory   Goodwill   Total  ​  Undepleted   Acquisition   Differential   Jan. 1, 2017  ( $10 , 000 ) $30 , 000 $575 , 000 $595 , 000 ​  Changes  2017 − 2019 $3 , 000 ( 10  years SL)  ​ ( $30 , 000 ) ⋯⋯ − ⋅ ( $27 , 000 ) ​  Balance Dec. 31,  2019 ( $7 , 000 ) − $575 , 000 $568 , 000 ​  Changes 2020  $1 , 000 − $1 , 000 ​  Balance Dec. 31,  2020 ( $6 , 000 ) − $575 , 0000 $569 , 000 ​ ​

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