1. The full amount of the differential at acquisition was assigned to buildings and equipment with a remaining 10-year economic life

Randall Corporation acquired 80 percent of Sharp Company’s voting shares on January 1, 20X4, for $280,000 in cash and marketable securities. At that date, the noncontrolling interest had a fair value of $70,000 and Sharp reported net assets of $300,000. Assume Randall uses the fully adjusted equity method. Trial balances for the two companies on December 31, 20X7, are as follows:

.:.

Additional Information

1. The full amount of the differential at acquisition was assigned to buildings and equipment with a remaining 10-year economic life.

2. Randall and Sharp regularly purchase inventory from each other. During 20X6, Sharp Company sold inventory costing $40,000 to Randall Corporation for $60,000, and Randall resold 60 percent of the inventory in 20X6 and 40 percent in 20X7. Also in 20X6, Randall sold inventory costing $20,000 to Sharp for $26,000. Sharp resold two-thirds of the inventory in 20X6 and one-third in 20X7.

3. During 20X7, Sharp sold inventory costing $30,000 to Randall for $45,000, and Randall sold items purchased for $9,000 to Sharp for $12,000. Before the end of the year, Randall resold one-third of the inventory it purchased from Sharp in 20X7. Sharp continues to hold all the units purchased from Randall during 20X7.

4. Sharp owes Randall $10,000 on account on December 31, 20X7.

5. Assume that both companies use straight-line depreciation and that no property, plant, and equipment has been purchased since the acquisition.

Required

a. Prepare the 20X7 journal entries recorded on Randall's books related to its investment in Sharp if Randall uses the equity method.

b. Prepare all elimination entries needed to complete a consolidation worksheet as of December 31, 20X7.

c. Prepare a three-part consolidation worksheet as of December 31, 20X7.

d. Prepare, in good form, a consolidated income statement, balance sheet, and retained earnings statement for 20X7.

SOLUTION:

Equity Method Entries on Randall Corp.'s Books:	Equity Method Entries on Randall Corp.'s Books:	Equity Method Entries on Randall Corp.'s Books:	Equity Method Entries on Randall Corp.'s Books:
Investment in Sharp Co.	Investment in Sharp Co.		32,000
Income from Sharp Co.	Income from Sharp Co.			32,000
Record Randall Corp.'s 80% share of Sharp Co.'s 20X7 income
Cash			20,000
Investment in Sharp Co.	Investment in Sharp Co.			20,000
Record Randall Corp.'s 80% share of Sharp Co.'s 20X7 dividend
Income from Sharp Co.	Income from Sharp Co.		4,000
Investment in Sharp Co.	Investment in Sharp Co.			4,000
Record amortization of excess acquisition price	Record amortization of excess acquisition price	Record amortization of excess acquisition price	Record amortization of excess acquisition price
Investment in Sharp Co.	Investment in Sharp Co.		2,000
Income from Sharp Co.	Income from Sharp Co.			2,000
Reverse of the deferred gross profit from downstream sales in 20X6
Income from Sharp Co.	Income from Sharp Co.		3,000
Investment in Sharp Co.	Investment in Sharp Co.			3,000
Eliminate the deferred gross profit from downstream sales in 20X7
Investment in Sharp Co.	Investment in Sharp Co.		6,400
Income from Sharp Co.	Income from Sharp Co.			6,400
Reverse of the deferred gross profit from upstream sales in 20X6
Income from Sharp Co.	Income from Sharp Co.		8,000
Investment in Sharp Co.	Investment in Sharp Co.			8,000
Eliminate the deferred gross profit from upstream sales in 20X7

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Book Value Calculations:	Book Value Calculations:
	NCI 20%	+	Randall Corp. 80%	=	Common Stock	+	Add. Paid-in Capital	+	Retained Earnings
Beginning book value	67,000		268,000		100,000		20,000		215,000
+ Net Income	8,000		32,000						40,000
- Dividends	(5,000)		(20,000)						(25,000)
Ending book value	70,000		280,000		100,000		20,000		230,000

Reversal/Deferred GP Calculations:	Reversal/Deferred GP Calculations:	Reversal/Deferred GP Calculations:
	Total	=	Randall Corp.'s share	+	NCI's share	NCI's share
Downstream Reversal	2,000		2,000
Upstream Reversal	8,000		6,400		1,600
Downstream Deferred GP	(3,000)		(3,000)
Upstream Deferred GP	(10,000)		(8,000)		(2,000)
Total	(3,000)		(2,600)		(400)

Basic elimination entry	Basic elimination entry
Common stock		100,000		← Common stock balance
Additional paid-in capital	Additional paid-in capital	20,000		← Beginning balance in APIC
Retained earnings		215,000		← Beginning balance in RE
Income from Sharp Co.	Income from Sharp Co.	29,400		← Randall’s % of NI - Def. GP + Reversal
NCI in NI of Sharp Co.	NCI in NI of Sharp Co.	7,600		← NCI share of NI - Def. GP + Reversal
Dividends declared	Dividends declared		25,000	← 100% of Sharp Co.'s dividends
Investment in Sharp Co.	Investment in Sharp Co.		277,400	← Net book value - Def. GP + Reversal
NCI in NA of Sharp Co.	NCI in NA of Sharp Co.		69,600	← NCI share of BV - Def. GP + Reversal

Excess Value (Differential) Calculations:	Excess Value (Differential) Calculations:	Excess Value (Differential) Calculations:	Excess Value (Differential) Calculations:
	NCI 20%	+	Randall Corp. 80%	=	Buildings & equipment	+	Acc. Depr.
Beginning balance	7,000		28,000		50,000		(15,000)
Changes	(1,000)		(4,000)				(5,000)
Ending balance	6,000		24,000		50,000		(20,000)

Amortized excess value reclassification entry:	Amortized excess value reclassification entry:	Amortized excess value reclassification entry:
Depreciation expense		5,000
Income from Sharp Co.			4,000
NCI in NI of Sharp Co.	NCI in NI of Sharp Co.		1,000

Excess value (differential) reclassification entry:	Excess value (differential) reclassification entry:	Excess value (differential) reclassification entry:
Buildings & equipment		50,000
Accumulated depreciation			20,000
Investment in Sharp Co.	Investment in Sharp Co.		24,000
NCI in NA of Sharp Co.	NCI in NA of Sharp Co.		6,000

Eliminate intercompany accounts:	Eliminate intercompany accounts:	Eliminate intercompany accounts:
Accounts payable			10,000
Accounts receivable	Accounts receivable				10,000

Optional accumulated depreciation elimination entry
Accumulated depreciation		40,000
Building & equipment				40,000

Reversal of last year's deferral:
Investment in Sharp Co.	8,400
NCI in NA of Sharp Co.	1,600
Cost of Goods Sold		10,000	10,000

Deferral of this year's unrealized profits on inventory transfers
Sales		57,000
Cost of Goods Sold	Cost of Goods Sold		44,000
Inventory			13,000

20X6 Downstream Transactions:
	Total	=	Re-sold	+	Ending Inventory
Sales	26,000		17,333		8,667
COGS	20,000		13,333		6,667
Gross Profit	6,000		4,000		2,000
Gross Profit %	23.08%
20X7 Downstream Transactions:
	Total	=	Re-sold	+	Ending Inventory
Sales	12,000		0		12,000
COGS	9,000		0		9,000
Gross Profit	3,000		0		3,000
Gross Profit %	25.00%

20X6 Upstream Transactions:	20X6 Upstream Transactions:
	Total	=	Re-sold	+	Ending Inventory
Sales	60,000		36,000		24,000
COGS	40,000		24,000		16,000
Gross Profit	20,000		12,000		8,000
Gross Profit %	33.33%
20X7 Upstream Transactions:	20X7 Upstream Transactions:
	Total	=	Re-sold	+	Ending Inventory
Sales	45,000		15,000		30,000
COGS	30,000		10,000		20,000
Gross Profit	15,000		5,000		10,000
Gross Profit %	33.33%

	Investment in	Investment in		Income from	Income from
	Sharp Co.	Sharp Co.		Sharp Co.	Sharp Co.
Beginning Balance	287,600
80% Net Income	32,000				32,000	80% Net Income
		20,000	80% Dividends
		4,000	Excess Val. Amort.	4,000
20X6 Reversal	8,400	11,000	Deferred GP	11,000	8,400	20X6 Reversal
Ending Balance	293,000				25,400	Ending Balance
Reversal	8,400	277,400	Basic	29,400
		24,000	Excess Reclass.		4,000
	0				0

		Randall Corp.	Sharp Co.	Elimination Entries	Elimination Entries
		Randall Corp.	Sharp Co.	DR	CR	Consolidated
Income Statement
Sales		500,000	250,000	57,000		693,000
Other Income		20,400	30,000			50,400
Less: COGS		(416,000)	(202,000)		10,000	(564,000)
					44,000
Less: Depreciation & Amortization Exp.	Less: Depreciation & Amortization Exp.	(30,000)	(20,000)	5,000		(55,000)
Less: Other Expenses		(24,000)	(18,000)			(42,000)
Income from Sharp Co.		25,400		29,400	4,000	0
Consolidated Net Income		75,800	40,000	91,400	58,000	82,400
NCI in Net Income				7,600	1,000	(6,600)
Controlling Interest in Net Income		75,800	40,000	99,000	59,000	75,800
Statement of Retained Earnings
Beginning Balance		337,500	215,000	215,000		337,500
Net Income		75,800	40,000	99,000	59,000	75,800
Less: Dividends Declared		(50,000)	(25,000)		25,000	(50,000)
Ending Balance		363,300	230,000	314,000	84,000	363,300
Balance Sheet
Cash		130,300	10,000			140,300
Accounts Receivable		80,000	70,000		10,000	140,000
Inventory		170,000	110,000		13,000	267,000
Buildings & Equipment		600,000	400,000	50,000	40,000	1,010,000
Less: Accumulated Depreciation		(310,000)	(120,000)	40,000	20,000	(410,000)
Investment in Sharp Co.		293,000		8,400	277,400	0
					24,000
Total Assets		963,300	470,000	98,400	384,400	1,147,300
Accounts Payable		100,000	15,200	10,000		105,200
Bonds Payable		300,000	100,000			400,000
Bond Premium			4,800			4,800
Common Stock		200,000	100,000	100,000		200,000
Additional Paid-in Capital			20,000	20,000		0
Retained Earnings		363,300	230,000	314,000	84,000	363,300
NCI in NA of Sharp Co.				1,600	69,600	74,000
					6,000
Total Liabilities & Equity		963,300	470,000	445,600	159,600	1,147,300

d.	Randall Corporation and Subsidiary Consolidated Balance Sheet December 31, 20X7	Randall Corporation and Subsidiary Consolidated Balance Sheet December 31, 20X7	Randall Corporation and Subsidiary Consolidated Balance Sheet December 31, 20X7	Randall Corporation and Subsidiary Consolidated Balance Sheet December 31, 20X7	Randall Corporation and Subsidiary Consolidated Balance Sheet December 31, 20X7
Cash	Cash			$ 140,300
Accounts Receivable	Accounts Receivable			140,000
Inventory	Inventory			267,000
Total Current Assets	Total Current Assets				$ 547,300
Buildings and Equipment	Buildings and Equipment			$1,010,000
Less: Accumulated Depreciation	Less: Accumulated Depreciation			(410,000)	600,000
Total Assets	Total Assets				$1,147,300
Accounts Payable	Accounts Payable				$ 105,200
Bonds Payable	Bonds Payable			$ 400,000
Bond Premium	Bond Premium			4,800	404,800
Stockholders’ Equity:	Stockholders’ Equity:
Controlling Interest:	Controlling Interest:
Common Stock	Common Stock			$ 200,000
Retained Earnings	Retained Earnings			363,300
Total Controlling Interest	Total Controlling Interest	Total Controlling Interest	Total Controlling Interest	$ 563,300
Noncontrolling Interest	Noncontrolling Interest	Noncontrolling Interest	Noncontrolling Interest	74,000
Total Stockholders’ Equity	Total Stockholders’ Equity	Total Stockholders’ Equity	Total Stockholders’ Equity		637,300
Total Liabilities and Stockholders' Equity	Total Liabilities and Stockholders' Equity	Total Liabilities and Stockholders' Equity	Total Liabilities and Stockholders' Equity		$1,147,300
Randall Corporation and Subsidiary Consolidated Income Statement Year Ended December 31, 20X7
Sales	Sales				$ 693,000
Other Income	Other Income				50,400
					$ 743,400
Cost of Goods Sold	Cost of Goods Sold			$ 564,000
Depreciation and Amortization Expense	Depreciation and Amortization Expense	Depreciation and Amortization Expense	Depreciation and Amortization Expense	55,000
Other Expenses	Other Expenses	Other Expenses	Other Expenses	42,000	(661,000)
Consolidated Net Income	Consolidated Net Income				$ 82,400
Income to Noncontrolling Interest	Income to Noncontrolling Interest				(6,600)
Income to Controlling Interest	Income to Controlling Interest				$ 75,800
Randall Corporation and Subsidiary Consolidated Statement of Retained Earnings Year Ended December 31, 20X7
Retained Earnings, January 1, 20X7	Retained Earnings, January 1, 20X7	Retained Earnings, January 1, 20X7	Retained Earnings, January 1, 20X7		$ 337,500
Income to Controlling Interest, 20X7	Income to Controlling Interest, 20X7	Income to Controlling Interest, 20X7	Income to Controlling Interest, 20X7		75,800
					$ 413,300
Dividends Declared, 20X7	Dividends Declared, 20X7	Dividends Declared, 20X7	Dividends Declared, 20X7		(50,000)
Retained Earnings, December 31, 20X7	Retained Earnings, December 31, 20X7	Retained Earnings, December 31, 20X7	Retained Earnings, December 31, 20X7		$ 363,300