Chapter 7 PSP
Susie Graham
Palm Company owns 80% of the outstanding common stock of Scuba Company. The stock was purchased for $328,000 on January 1, 2019, when Scuba Co. had $160,000 in capital stock and retained earnings were $250,000.
On February 30, 2019, Scuba Company sold equipment to Palm Company for $500,000. The equipment cost Scuba Company $740,000 and had accumulated depreciation of $300,000 on the date of the sale. The management of Palm Company estimated the equipment had a remaining useful life of 5 years from February 30, 2019.
A second sale occurred on May 30, 2019 when Palm Company sold land to Scuba company for $175,000. Palm Company had originally purchased the land in May of 2018 for $100,000.
(A) Prepare the journal entries by Palm Co. and Scuba Co. to record the intercompany sales in 2019
Upstream Sale
P’s Books:
Equipment 500,000
Cash 500,000
S’s Books:
Cash 500,000
Accumulated Depreciation 300,000
Equipment 740,000
Gain on Sale of Equipment 60,000
Downstream Sale
P’s Books:
Cash 175,000
Land 100,000
Gain on Sale of Land 75,000
S’s Books:
Land 175,000
Cash 175,000
Financial Data for the year ended 12/31/2019
Implied Value: 328,000/.80 = $410,000
NCI: 410,000 x .20 = $82,000
Differential: IV - (S’s Beginning RE + S’s CS)
= 410,000 - (250,000 + 160,000)
= 0
(B) Prepare the WEs necessary for the year ended December 31, 2019.
Dividend WE:
Equity in S income (.80 x 225,000) 180,000
Dividends Declared - S (.80 x 40,000) 32,000
Investment in S (Plug) 148,000
NCI WE:
NCI Income [.20 x (225,000 + (60,000 upstream gain/5yr))] 47,400
Dividends Declared - S (.20 x 40,000) 8,000
NCI (Plug) 39,400
Basic WE
Capital Stock 160,000
Retained Earnings - S, 1/1 250,000
Investment in S 328,000
NCI 82,000
Upstream Sale WE:
Equipment (740,000 - 500,000) 240,000
Gain on Sale 60,000
Accumulated Depreciation 300,000
*Gain Realized Through Use:
Recorded Deprecation: (500,000/5yr) x 10/12 mo. $83,333
Correct Depreciation: [(740,000 - 300,000)/5yr x 10/12 mo.] $73,333
Depreciation Reduction: $10,000
*Accumulated Depreciation 10,000
Depreciation Expense 10,000
Downstream Sale WE:
Gain on Sale of Land 75,000
Land 75,000
(B) 2019 WEs Continued
On May 30, 2020, Scuba Company sold the land purchased from Palm Company to a company outside the affiliated group for $215,000.
(C) Calculate the gain on the sale of the land that is recognized on the books of the Scuba Company in 2020.
External Selling Price: 215,000
S’s Carrying Value: 175,000
Recorded Gain by Scuba Co.: $40,000
(D) Calculate the gain on the sale of the land that should be recognized in the consolidated statements in 2020.
External Selling Price: 215,000
Historical Cost to Palm Co.: 100,000
Desired Gain in Consolidated Income: $115,000
Financial Data for the year ended 12/31/2020
(F) Prepare the full set of WEs for the year ended December 31, 2020.
Dividend WE:
Equity in S income (460,000 x .80) 368,000
Dividends Declared - S (.80 x 70,000) 56,000
Investment in S (plug) 312,000
NCI WE:
NCI Income [.20 x (460,000 + (60,000 gain/5yr)] 94,400
Dividends Declared - S (.20 x 70,000) 14,000
NCI (plug) 80,400
Basic WE:
Capital Stock - S 160,000
Retained Earnings - S, 1/1 465,000
Investment in S [328,000 + .80(465,000 - 250,000)] 500,000 NCI [82,000 + .20(465,000 - 250,000)] 125,000
(F) 2020 WEs Continued
Original Gain WE: (this has to be done for five years)
Equipment (740,000 - 500,000) 240,000
Retained Earnings - P, 1/1 (.80 x 60,000) 48,000
NCI, 1/1 (60,000 x .20) 12,000
Accumulated Depreciation 300,000
Depreciation Since Gain WE:
Accumulated Depreciation (60,000/5yr x 2yr) 24,000
Depreciation Expense (60,000/5yr) 12,000
Retained Earnings - P, 1/1 (12,000 x .80) 9,600
NCI, 1/1 (.20 x 12,000) 2,400
Downstream Sale (subsequent sale of land to outsiders):
` Retained Earnings-P, 1/1 (115,000 - 40,000) 75,000
Gain on Sale of Land 75,000