Asked by elena ustimchuk on May 21, 2024
Verified
On January 1, 20X5, PX's shareholders' equity was as follows:
Common shares $40,000 Retained earnings $140,000‾$180,000‾\begin{array} { l l } \text { Common shares } & \$ 40,000 \\\text { Retained earnings } & \underline{ \$ 140,000} \\& \underline{\$ 180,000}\end{array} Common shares Retained earnings $40,000$140,000$180,000 GL held 90% of the 8,000 outstanding shares of PX on January 1, 20X5, and its investment in PX account had a balance of $252,000 on that date. GL accounts for its investment in its subsidiary by the equity method using the entity approach. At the time of acquisition of PX, the only fair value increment arising was due to the patent, which had a remaining life of five years on January 1, 20X5.
The following transactions took place subsequent to January 1, 20X5:
• During 20X5, PX reported a net income of $80,000 (earned equally throughout the year).
• PX declared dividends of $10,000 on September 1.
• During 20X6, PX reported a net income of $76,000 and paid dividends of $16,000 on December 1.
• During 20X6, PX sold equipment to GL for $140,000. At the time, the net book value of the equipment to PX was $100,000. There are four years remaining on the useful life of the equipment. Both companies record a full year of depreciation expense in the year of the purchase and no depreciation in the year of a sale.
Required:
Assuming that no value is assigned to patents on the separate-entity financial statements for GL and PX, calculate patents on the consolidated balance sheet at December 31, 20X6.
Calculate the allocation of the consolidated net income to the non-controlling interest for each of 20X5 and 20X6.
Consolidated Net Income
The total net income of a parent company and its subsidiaries after eliminating inter-company transactions.
Non-Controlling Interest
This refers to the portion of equity in a subsidiary not owned by the parent company, representing minority shareholders' rights in the subsidiary's net assets.
- Establish the apportionment and recognition of non-controlling interest (NCI) in unified financial statements.
- Incorporate adjustments for depreciation and amortization in the consolidation process for assets traded between affiliated corporations.
Verified Answer
JE
Josie EdwardsMay 25, 2024
Final Answer :
Calculation of patents balance at Dec 31, 20X6
Investment account, Jan. 1, 2005-date of acquisition $252,000‾ Fair value of 100% of PX(252,000/0.9)$280,000 Less: Net book value of IX’s shareholders’ equity $180,000‾ I’atents, Jan. 1,20X5 $100,000\begin{array} { l l } \text { Investment account, Jan. 1, 2005-date of acquisition } & \underline{ \$ 252,000} \\\text { Fair value of } 100 \% \text { of } P X ( 252,000 / 0.9 ) & \$ 280,000 \\\text { Less: Net book value of IX's shareholders' equity } & \underline{\$ 180,000 }\\\text { I'atents, Jan. 1,20X5 } & \$ 100,000\end{array} Investment account, Jan. 1, 2005-date of acquisition Fair value of 100% of PX(252,000/0.9) Less: Net book value of IX’s shareholders’ equity I’atents, Jan. 1,20X5 $252,000$280,000$180,000$100,000 Less amortization of fair value increment
for two years 20×5 and 20×6$100,000/5×2=(40000)‾\begin{array}{l}\text { for two years } 20 \times 5 \text { and } 20 \times 6 \$ 100,000 / 5 \times 2=& \underline{ (40000) }\end{array} for two years 20×5 and 20×6$100,000/5×2=(40000) Consolidated balance-December 31, 20X6 $60,000‾\begin{array}{ll} \text { Consolidated balance-December 31, 20X6 } & \underline {\$60,000 } \\\end{array} Consolidated balance-December 31, 20X6 $60,000
Calculation of non-controlling interest's portion of net income:
20X6-Gain on upstream sale of equipment (140,000 - 100,000)= $40,000
Four years remaining
Amount of excess depreciation recorded each year: $40,000/4 = $10,000, commencing in 20X6
20X520X6$$ Net income for PX-separate entity 80,00076,000 Less fair value increment amortization of patent (20,000)(20,000 Unrealized gain on upstream sale of equipment in 20X6 (40,000 Excess depreciation-realized portion of gain in each year 10,000‾ Adjusted net income 60,000‾26,000‾ NCI’s portion 10%6,000‾2,600‾\begin{array}{|l|r|c|}\hline& 20X5 & 20X 6 \\&\$ & \$\\\hline \text { Net income for PX-separate entity } & 80,000 & 76,000 \\\hline \text { Less fair value increment } & & \\\text { amortization of patent } & (20,000) & (20,000 \\\hline \text { Unrealized gain on upstream sale of } & & \\\text { equipment in 20X6 } & & (40,000 \\\hline\text { Excess depreciation-realized } \\\text { portion of gain in each year } & & \underline{10,000} \\\hline \text { Adjusted net income } & \underline{60,000} & \underline{26,000} \\\hline \text { NCI's portion } 10 \% & \underline{6,000} & \underline{2,600}\\\hline\end{array} Net income for PX-separate entity Less fair value increment amortization of patent Unrealized gain on upstream sale of equipment in 20X6 Excess depreciation-realized portion of gain in each year Adjusted net income NCI’s portion 10%20X5$80,000(20,000)60,0006,00020X6$76,000(20,000(40,00010,00026,0002,600
Investment account, Jan. 1, 2005-date of acquisition $252,000‾ Fair value of 100% of PX(252,000/0.9)$280,000 Less: Net book value of IX’s shareholders’ equity $180,000‾ I’atents, Jan. 1,20X5 $100,000\begin{array} { l l } \text { Investment account, Jan. 1, 2005-date of acquisition } & \underline{ \$ 252,000} \\\text { Fair value of } 100 \% \text { of } P X ( 252,000 / 0.9 ) & \$ 280,000 \\\text { Less: Net book value of IX's shareholders' equity } & \underline{\$ 180,000 }\\\text { I'atents, Jan. 1,20X5 } & \$ 100,000\end{array} Investment account, Jan. 1, 2005-date of acquisition Fair value of 100% of PX(252,000/0.9) Less: Net book value of IX’s shareholders’ equity I’atents, Jan. 1,20X5 $252,000$280,000$180,000$100,000 Less amortization of fair value increment
for two years 20×5 and 20×6$100,000/5×2=(40000)‾\begin{array}{l}\text { for two years } 20 \times 5 \text { and } 20 \times 6 \$ 100,000 / 5 \times 2=& \underline{ (40000) }\end{array} for two years 20×5 and 20×6$100,000/5×2=(40000) Consolidated balance-December 31, 20X6 $60,000‾\begin{array}{ll} \text { Consolidated balance-December 31, 20X6 } & \underline {\$60,000 } \\\end{array} Consolidated balance-December 31, 20X6 $60,000
Calculation of non-controlling interest's portion of net income:
20X6-Gain on upstream sale of equipment (140,000 - 100,000)= $40,000
Four years remaining
Amount of excess depreciation recorded each year: $40,000/4 = $10,000, commencing in 20X6
20X520X6$$ Net income for PX-separate entity 80,00076,000 Less fair value increment amortization of patent (20,000)(20,000 Unrealized gain on upstream sale of equipment in 20X6 (40,000 Excess depreciation-realized portion of gain in each year 10,000‾ Adjusted net income 60,000‾26,000‾ NCI’s portion 10%6,000‾2,600‾\begin{array}{|l|r|c|}\hline& 20X5 & 20X 6 \\&\$ & \$\\\hline \text { Net income for PX-separate entity } & 80,000 & 76,000 \\\hline \text { Less fair value increment } & & \\\text { amortization of patent } & (20,000) & (20,000 \\\hline \text { Unrealized gain on upstream sale of } & & \\\text { equipment in 20X6 } & & (40,000 \\\hline\text { Excess depreciation-realized } \\\text { portion of gain in each year } & & \underline{10,000} \\\hline \text { Adjusted net income } & \underline{60,000} & \underline{26,000} \\\hline \text { NCI's portion } 10 \% & \underline{6,000} & \underline{2,600}\\\hline\end{array} Net income for PX-separate entity Less fair value increment amortization of patent Unrealized gain on upstream sale of equipment in 20X6 Excess depreciation-realized portion of gain in each year Adjusted net income NCI’s portion 10%20X5$80,000(20,000)60,0006,00020X6$76,000(20,000(40,00010,00026,0002,600
Learning Objectives
- Establish the apportionment and recognition of non-controlling interest (NCI) in unified financial statements.
- Incorporate adjustments for depreciation and amortization in the consolidation process for assets traded between affiliated corporations.