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    Mother Corp Consolidation Son and Daughter Non-controlling

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    You should provide a list of all journal entries that you record as part of putting together the consolidated financial statements with a clear indication of where the journal entries are posted. They could be posted to Mother Company's books, or in the Consolidation Worksheets (all entries needed for Son and Daughter Company were completed correctly by their accountants).

    Second, you should provide a completed consolidation spreadsheet for Mother Company.

    Finally, you should submit a consolidated Balance Sheet, Statement of Retained Earnings, and Income Statement for his company, "Mother Company", for 2012 (year ended Dec. 31, 2012, or as of Dec. 31, 2012, as appropriate). These financial statements should be for the consolidated company to the extent consolidation is appropriate.

    College buddy doesn't clarify this, but investments to be consolidated should be accounted for on Mother Company's financial statements using the equity method.

    Under the full equity method, there are some adjustments necessary for inter-entity transfers of depreciable assets. Any gain on such a transfer would need to be deferred (similar to the deferral of gross profit on inter-entity inventory transfers). The full amount of the gain will charged against "Equity in Investee's Income" (where "Investee" would normally be replaced by the name of the investee company) as a debit, and the credit side of the entry will be a reduction to the investment account. Each year the investor will get to recognize a portion of this gain equal to the difference between the depreciation that would have been recognized by the selling company and the depreciation that was recognized by the purchasing company. This will be done by debiting the investment account, and crediting "Equity in Investee's Income".

    Dear Student,
    I am the CFO of Mother Corporation. On January 1, 2012 my company made two investments. First, we purchased 19% of Daughter Company for $237,500. Second, we purchased 85% of Son Company for $680,000. We plan on holding both investments for the foreseeable future, though we could sell them if we need the cash. (They have both done very well for us; the daughter company stock was worth $380,000 as of Dec.31, 2012, and we estimate the Son Company stock was worth $1,122,000 as of December 31, 2012!) I know almost nothing about accounting for investments and need your help in putting together my company's financial statements for the year ended December 31, 2012.

    When determining the appropriate price to pay for these investments, we determined the following information.
    Daughter Company's book value on January 1, 2012 was $1,105,000. However, they owned software which we believe was undervalued by $40,000 and which had 10 years of remaining life. In addition, we determined that their equipment was undervalued on their books by $50,000. The equipment had a remaining life of 8 years.

    Son's book value as of January 1, 2012 was $460,000. The remaining 15% of the stock (15,000 shares) was trading at $7.00 per share both before and after our acquisition. In addition, we determined that their building was undervalued by $70,000 and had 7 years of remaining useful life, and that their software was undervalued by $160,000 and had 4 years of remaining useful life.

    I have attached a copy of all three companies' preliminary balance sheets (Dec. 31, 2012), and statements of retained earnings and income statements for the year ended Dec. 31, 2012. I have also attached the footnotes for our (Mother Company's) financial statements.

    As I stated above, I don't know very much about accounting for investments. Therefore, we have done very little accounting for these two investments. Specifically, we have recorded only the following journal entries:
    Dr Investment in Daughter Co. 237,500
    Cr Cash 237,500
    Dr Investment in Son Co. 680,000
    Cr Cash 680,000
    (I haven't even recorded the cash we received as dividends from them yet, because I had no idea what the credit side of that journal entry should be.)

    Prof. Hansen tells me that you guys are experts at accounting for investments, and I look forward to seeing the financial statements. I am especially eager to be able to show my boss how much money we made by buying these investments. I get a really big bonus if our return on assets is higher than 12%, and the increased value of these investments should get us there no problem! When I get the big check, I might even invite all you guys over to the house for a big celebration.

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    Solution Preview

    Your tutorial is attached. The adjusting entries that must be booked are separated from the consolidating entries. The consolidating spreadsheet linked to the journal entries so this is now a template for other ...

    Solution Summary

    Your tutorial is attached. The adjusting entries that must be booked are separated from the consolidating entries. The consolidating spreadsheet linked to the journal entries so this is now a template for other similar problems. There are schedules showing the purchase price allocation for the daughter corp and son corp purchases to compute goodwill. There is a schedule to allocate goodwill for Son Corp. There is a schedule to compute the gross profit that must be eliminated for the downstream sale of inventory. The useful life of the equipment sold by Mother Corp to Son Corp was not given so I assumed 8 years. You can change this cell (see red arrow) and the entire spreadsheet will update for any life you are given. There is a check figure in the lower right and a total for debits and credits that are controls when you use this for other problems.