Inventory (120,000)

Unamortized acquisition differential 700,000

10,840,000

25%

Non-controlling interest 2,710,000

Calculation of non-controlling interests – December 31, Year 5 (Method 2)

Non-controlling interests at date of acquisition (25% x [4,800,000 / .75) 1,600,000

Devine’s adjusted increase in retained earnings (a) 4,440,000

NCI’s share @ 25% 1,110,000

Non-controlling interest, December 31, Year 5 2,710,000

(e)

Non-controlling interest – at date of acquisition

- under implied value approach (25% x 6,400,000) 1,600,000

- using market value of Devine’s shares (20,000 shares x $75) 1,500,000

Decrease in non-controlling interest 100,000

Non-controlling interest, December 31, Year 3

- as previously calculated 2,710,000

- as per new calculation 2,610,000

Goodwill at December 31, Year 3

- as previously calculated 600,000

- decrease due to change in non-controlling interest 100,000

- as per new calculation 500,000

Problem 7-2

Equipment gain

Before Tax 40% tax After tax

Year 2 sale – Sally selling 15,000

* Depreciation Years 2 and 3 (3,000  2) 6,000

Balance December 31, Year 3 9,000 3,600 5,400

Depreciation Year 4 3,000 1,200 1,800 (a)

Balance December 31, Year 4 6,000 2,400 (b) 3,600

* Assuming the sale took place at the beginning of Year 2

(a) Calculation of consolidated profit – Year 4

Profit of Peggy 185,000

Profit of Sally 53,000

Add: Equipment gain realized (a) 1,800

Adjusted profit 54,800 (c)

Consolidated profit 239,800

Attributable to:

Shareholders of Peggy 226,100

NCI (25% x 54,800) 13,700

239,800

(b) Peggy Company

Consolidated Income Statement

Year 4

Revenues (580,000 + 270,000) $850,000

Miscellaneous expense (110,000 + 85,000) 195,000

Depreciation expense (162,000 + 97,000 - (a) 3,000) 256,000

Income tax expense (123,000 + 35,000 + (a) 1,200) 159,200

Total expenses 610,200

Consolidated profit 239,800

Attributable to:

Shareholders of Peggy 226,100

NCI (25% x 54,800) 13,700

239,800

(c) Deferred income taxes - December 31, Year 4 (b) 2,400

Problem 7-3

Intercompany profits – subsidiary selling

Before tax 40% tax After tax

Equipment

Sale, Sept. 30, Year 5 8,000 3,200 4,800

Depreciation Year 5

(8,000 / 5  3/12) 400 160 240 (a)

Balance, Dec. 31, Year 5 7,600 3,040 4,560 (b)

Depreciation Year 6 (8,000 / 5) 1,600 640 960 (c)

Balance, Dec. 31, Year 6 6,000 2,400 3,600

Building

Sale, Jan. 1, Year 6 42,000 16,800 25,200

Depreciation Year 6 (42,000 / 7) 6,000 2,400 3,600 (d)

Balance, Dec. 31, Year 6 36,000 14,400 21,600 (e)

Intercompany Rent

Year 5 (12,000  3/12) 3,000 (f)

Year 6 12,000 (g)

Calculation of consolidated net income

Year 5 Year 6

Incorrectly reported income 120,000 142,000

Add: incorrect amount for NCI 32,500 5,160

Incorrect amount for consolidated net income 152,500 147,160

Less: Net unrealized profits

Equipment (b) 4,560

Building (e) 21,600

Add: equipment profit realized (c) 960

(h) 4,560 (i) 20,640

Corrected consolidated net income 147,940 126,520

Attributable to:

Shareholders of Parent 116,580 126,520

NCI (32,500 - 25% x (h) 4,560) 31,360

NCI (5,160 - 25% x (i) 20,640) 00,000

147,940 126,520

Parent Company

Corrected Consolidated Income Statements

Years 5 and 6

Year 5 Year 6

Miscellaneous revenues $750,000 $825,000

Miscellaneous expense 399,800 492,340

Rent expense (52,700 – (f) 3,000) 49,700

(64,300 – (g) 12,000) 52,300

Depreciation expense (75,000 – (a) 400) 74,600

(80,700 – (c) 1,600 – (d) 6,000) 73,100

Income tax expense (81,000 – (b) 3,040) 77,960

(94,500 + (c) 640 – (e) 14,400) 80,740

Consolidated net income 147,940 126,520

Attributable to:

Shareholders of Parent 116,580 126,520

NCI (32,500 - 25% x (h) 4,560) 31,360

NCI (5,160 - 25% x (i) 20,640) 00,000

147,940 126,520

Problem 7-8