Baywatch Industries has owned 80 percent of Tubberware Corporation for many year

Question

Baywatch Industries has owned 80 percent of Tubberware Corporation for many years. On January 1, 20X6, Baywatch paid Tubberware $255,000 to acquire equipment that Tubberware had purchased on January 1, 20X3, for $273,000. The equipment is expected to have no scrap value and is depreciated over a 15-year useful life.

      Baywatch reported operating earnings of $110,000 for 20X8 and paid dividends of $40,000. Tubberware reported net income of $43,000 and paid dividends of $21,000 in 20X8

Compute the amount reported as consolidated net income for 20X8

By what amount would consolidated net income change if the equipment sale had been a downstream sale rather than an upstream sale?

Prepare the consolidation entry or entries required to eliminate the effects of the intercompany sale of equipment in preparing a full set of consolidated financial statements at December 31, 20X8.

Baywatch Industries has owned 80 percent of Tubberware Corporation for many years. On January 1, 20X6, Baywatch paid Tubberware $255,000 to acquire equipment that Tubberware had purchased on January 1, 20X3, for $273,000. The equipment is expected to have no scrap value and is depreciated over a 15-year useful life.

      Baywatch reported operating earnings of $110,000 for 20X8 and paid dividends of $40,000. Tubberware reported net income of $43,000 and paid dividends of $21,000 in 20X8

Explanation / Answer

Answer:

Note: depreciation expense: purchaser = ($255,000 / 12) = $21250; consolidated = ($273,000 / 15) = $18200

gain realized each year = differential depreciation = $18200 - $21250 = $3050 credit (gain realized)

Also note: there is no purchase differential to write-off or amortize since purchase price = book value

(a)

Baywatch’s separate operating income

$ 110,000

Baywatch’s share of Tubberware’s realized income:

     [($43,000 + $3050) x 80%]

     36840

Consolidated net income

$ 146840

(b)

Baywatch’s separate operating income realized ($110,000 + $3050)

$113050

Baywatch’s share of Tubberware’s income ($43,000 x 80%)

    34400

Consolidated net income

$147450

Consolidated net income would be $610 greater since the realized gain is entirely allocated to the parent (in (a), 20% is allocated to noncontrolling interest)

(c)

Retained Earnings, Jan. 1 ($11900 x 80%)

9520

Noncontrolling Interest ($11900 x 20%)

2380

Equipment ($300,000 - $270,000)

36600

     Depreciation Expense ($18200 - $21250)

3050

     Accumulated Depreciation [($18200 x 6 yrs) – ($21250 x 3 yrs)]

45450

Gain =$255,000– ($273,000 – ($18200 x 3 yrs))

= $36600

   

Unrealized gain at Jan 1 = $18,000 – ($3050 x 2 yrs) = $11900

(a)

Baywatch’s separate operating income

$ 110,000

Baywatch’s share of Tubberware’s realized income:

     [($43,000 + $3050) x 80%]

     36840

Consolidated net income

$ 146840

(b)

Baywatch’s separate operating income realized ($110,000 + $3050)

$113050

Baywatch’s share of Tubberware’s income ($43,000 x 80%)

    34400

Consolidated net income

$147450

Consolidated net income would be $610 greater since the realized gain is entirely allocated to the parent (in (a), 20% is allocated to noncontrolling interest)

(c)

Retained Earnings, Jan. 1 ($11900 x 80%)

9520

Noncontrolling Interest ($11900 x 20%)

2380

Equipment ($300,000 - $270,000)

36600

     Depreciation Expense ($18200 - $21250)

3050

     Accumulated Depreciation [($18200 x 6 yrs) – ($21250 x 3 yrs)]

45450

Gain =$255,000– ($273,000 – ($18200 x 3 yrs))

= $36600

   

Unrealized gain at Jan 1 = $18,000 – ($3050 x 2 yrs) = $11900

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