Pannier Company is the parent company that owns an 80% interest in Jodestar Company. The interest was acquired at book value, and the simple equity method is used to record the ownership interest. The trial balances of the two companies on December 31, 2016, were as follows:
As the year ended, Pannier was planning to transfer a major piece of equipment to Jodestar. The equipment was just purchased by Pannier and is included in its inventory account. The equipment cost Pannier $100,000 and would be transferred to Jodestar for $125,000. There are two options as follows:
- Sell the equipment to Jodestar for $125,000 and finance it with a 5-year, 10% interest installment note.
- Lease the equipment to Jodestar on a 5-year lease requiring payments of $29,977 in advance.
Required
1. Make the journal entries for both companies if the intercompany sale was consummated on
December 31.
2. Prepare a consolidated income statement and balance sheet for the company for 2016.
3. Make the journal entries for both companies if the intercompany lease was executed on
December 31.
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4. If the lease were used, how would the consolidated statements differ from those in part (2)?
SOLUTION
| (1) | Entries: | ||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Pannier: | Pannier: | Pannier: | |||||||||||||||||||||||||||||||||||||
| Notes Receivable............................................................ | Notes Receivable............................................................ | Notes Receivable............................................................ | Notes Receivable............................................................ | Notes Receivable............................................................ | Notes Receivable............................................................ | Notes Receivable............................................................ | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | ||||||||||||||
| Sales................................................................................. | Sales................................................................................. | Sales................................................................................. | Sales................................................................................. | Sales................................................................................. | Sales................................................................................. | Sales................................................................................. | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | ||||||||||||||||
| Cost of Goods Sold......................................................... | Cost of Goods Sold......................................................... | Cost of Goods Sold......................................................... | Cost of Goods Sold......................................................... | Cost of Goods Sold......................................................... | Cost of Goods Sold......................................................... | Cost of Goods Sold......................................................... | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | ||||||||||||||
| Inventory........................................................................... | Inventory........................................................................... | Inventory........................................................................... | Inventory........................................................................... | Inventory........................................................................... | Inventory........................................................................... | Inventory........................................................................... | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | ||||||||||||||||
| Jodestar: | Jodestar: | Jodestar: | Jodestar: | Jodestar: | |||||||||||||||||||||||||||||||||||
| Equipment........................................................................ | Equipment........................................................................ | Equipment........................................................................ | Equipment........................................................................ | Equipment........................................................................ | Equipment........................................................................ | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | ||||||||||||
| Notes Payable................................................................... | Notes Payable................................................................... | Notes Payable................................................................... | Notes Payable................................................................... | Notes Payable................................................................... | Notes Payable................................................................... | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | 125,000 | ||||||||||||||||||
| (2) | Consolidated statements: | Consolidated statements: | |||||||||||||||||||||||||||||||||||||
| Consolidated Income Statement | Consolidated Income Statement | Consolidated Income Statement | Consolidated Income Statement | Consolidated Income Statement | Consolidated Income Statement | Consolidated Income Statement | Consolidated Income Statement | Consolidated Income Statement | Consolidated Income Statement | Consolidated Income Statement | Consolidated Income Statement | Consolidated Income Statement | Consolidated Income Statement | ||||||||||||||||||||||||||
| Sales............................................................. | Sales............................................................. | Sales............................................................. | Sales............................................................. | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | 320,000 | 320,000 | 320,000 | 320,000 | 320,000 | 320,000 | 320,000 | 320,000 | 320,000 | 320,000 | 320,000 | 320,000 | 320,000 | 320,000 | 320,000 | 320,000 | 320,000 | 320,000 | 320,000 | 320,000 | 320,000 | 320,000 | 320,000 | |
| Cost of goods sold....................................... | Cost of goods sold....................................... | Cost of goods sold....................................... | Cost of goods sold....................................... | (220,000) | (220,000) | (220,000) | (220,000) | (220,000) | (220,000) | (220,000) | (220,000) | (220,000) | (220,000) | (220,000) | (220,000) | (220,000) | (220,000) | (220,000) | (220,000) | (220,000) | (220,000) | (220,000) | (220,000) | (220,000) | (220,000) | (220,000) | (220,000) | (220,000) | (220,000) | (220,000) | (220,000) | (220,000) | (220,000) | (220,000) | (220,000) | (220,000) | (220,000) | (220,000) | |
| Gross profit................................................... | Gross profit................................................... | Gross profit................................................... | Gross profit................................................... | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | |
| Expenses..................................................... | Expenses..................................................... | Expenses..................................................... | Expenses..................................................... | (40,000) | (40,000) | (40,000) | (40,000) | (40,000) | (40,000) | (40,000) | (40,000) | (40,000) | (40,000) | (40,000) | (40,000) | (40,000) | (40,000) | (40,000) | (40,000) | (40,000) | (40,000) | (40,000) | (40,000) | (40,000) | (40,000) | (40,000) | (40,000) | (40,000) | (40,000) | ||||||||||
| Interest expense........................................... | Interest expense........................................... | Interest expense........................................... | Interest expense........................................... | (20,000) | (20,000) | (20,000) | (20,000) | (20,000) | (20,000) | (20,000) | (20,000) | (20,000) | (20,000) | (20,000) | (20,000) | (20,000) | (20,000) | (20,000) | (20,000) | (20,000) | (20,000) | (20,000) | (20,000) | (20,000) | (20,000) | (20,000) | (20,000) | (20,000) | (20,000) | ||||||||||
| Net income............................................. | Net income............................................. | Net income............................................. | Net income............................................. | $ | $ | $ | $ | $ | $ | 40,000 | 40,000 | 40,000 | 40,000 | 40,000 | 40,000 | 40,000 | 40,000 | ||||||||||||||||||||||
| Consolidated Balance Sheet | Consolidated Balance Sheet | Consolidated Balance Sheet | Consolidated Balance Sheet | Consolidated Balance Sheet | Consolidated Balance Sheet | Consolidated Balance Sheet | Consolidated Balance Sheet | Consolidated Balance Sheet | Consolidated Balance Sheet | Consolidated Balance Sheet | Consolidated Balance Sheet | Consolidated Balance Sheet | Consolidated Balance Sheet | ||||||||||||||||||||||||||
| Assets |
| Cash.................................... | $ 358,000 | $ 358,000 | $ 358,000 |
|---|---|---|---|
| Inventory.............................. | 90,000 | 90,000 | |
| Other current assets............ | 210,000 | 210,000 | |
| Plant and equipment............ | 1,250,000 | 1,250,000 | |
| Accumulated depreciation ... | (500,000) | (500,000) | (500,000) |
| Total............................... | $1,408,000 |
Liabilities and Equity
| Current liabilities................. | $ 45,000 | $ 45,000 | $ 45,000 |
|---|---|---|---|
| Long-term debt................... | 200,000 | 200,000 | 200,000 |
| NCI..................................... | 79,000* | 79,000* | 79,000* |
| Common stock (par).......... | 300,000 | 300,000 | |
| Retained earnings.............. | 784,000** | 784,000** | 784,000** |
| Total.............................. | $1,408,000 |
*NCI = 20% × ($100,000 + $285,000 + $10,000 Jodestar income)
Inventory is reduced by $100,000 and equipment is increased by $100,000 for the cost of the equipment sold to the subsidiary.
**$746,000 + $30,000 + (80% × $10,000)
| (3) Entries: | |
|---|---|
| Pannier: | |
| Minimum Lease Payments Receivable (4 × $29,977).................... | 119,908 |
| Cash................................................................................................ | 29,977 |
| Inventory...................................................................................... | 100,000 |
| Unearned Interest Income............................................................ | 24,885 |
| Sales-Type Profit on Lease........................................................... | 25,000 |
| Jodestar: | |
| Asset Under Capital Lease............................................................... | 125,000 |
| Cash............................................................................................. | 29,977 |
| Obligation Under Capital Lease.................................................. | 95,023 |
(4) There would be no difference in the consolidated statements.