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 $222,000 to acquire equipment that Tubberware had purchased on January 1, 20X3, for $249,000. 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 $45,000. Tubberware reported net income of $42,000 and paid dividends of $24,000 in 20X8.

Compute the amount reported as consolidated net income for 20X8.

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.

Explanation / Answer

Equipement Account

Accumulated Depreciation Account calculations

Accumulated Depreciation:= [(249000/15) x 6 yr] -  [(222000/12) x 3yr.]

= (16,600 x 6) - ( 18500 x 3) = 99,600 - 55,500 = $44,100.

Depreciation expense = 18500 - 16,600 = $1,900

Total = $44,100 + $1,900 = $46,000

Gain = 222,000 - [249,000 - (16,000 x 3 yr.)] = 222.000 - 199,200 = $22,800

Unrealised gain (or Retained earnings portion) on Jan 1, 20x8: = $22,800 - [(18500- 16,600) x 2 yr]

= $22,800 - $3,800 = $19,000

(a) Amount reported as consolidated net income for 20X8. Particulars Workings Amount($) Amount($) Operating income reported by Baywatch 110,000 Net income reported by Tubberware 42,000 Gain realized in 20X8 (27,000 / 12 years) 2,250 Realized net income of Tubberware 44,250 Consolidated net income 154,250

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