Question

Post Delivery Service acquired at book value 80 percent of the voting shares of Script Real Estate Company. On that date, the fair value of the noncontrolling interest was equal to 20 percent of the Script’s book value. Script Real Estate reported common stock of $280,000 and retained earnings of $95,000. During 20X3, Post Delivery provided courier services for Script Real Estate in the amount of $21,000. Also during 20X3, Script Real Estate purchased land for $2,000. It sold the land to Post Delivery Service for $27,000 so that Post Delivery could build a new transportation center. Post Delivery reported $52,000 of operating income from its delivery operations in 20X3. Script Real Estate reported net income of $54,000 and paid dividends of $10,000 in 20X3.

(A) Compute consolidated net income for 20X3.
(B) Prepare all journal entries recorded by Post Delivery Service related to its investment in Script Real Estate assuming Post uses the fully adjusted equity method in accounting for the investment. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
(C) Prepare all consolidation entries required in preparing a consolidation worksheet as of December 31, 20X3. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Consolidated net income for 20X3 is calculated by adding Post Delivery's operating income to its share of Script Real Estate's net income, after adjusting for intercompany transactions. Post Delivery's journal entries would include its share of Script's net income and dividends and eliminate intra-group profits. Consolidation entries would eliminate intra-group land sale, adjust for noncontrolling interest's share of Script's net income, and eliminate Post Delivery's equity income from its investment in Script.

Step-by-step explanation:

To compute the consolidated net income for 20X3, we must understand that when a parent company (Post Delivery Service) acquires a majority of the voting shares of a subsidiary (Script Real Estate), its net income includes its own income plus its share of the subsidiary's income, adjusted for intercompany transactions.

Post Delivery's operating income: $52,000

Script Real Estate's net income: $54,000

Post Delivery's share of Script's income (80%): $43,200

Gain on sale of land (to be eliminated in consolidation): $25,000 ($27,000 - $2,000 cost)

Consolidated net income = Post Delivery's operating income + Post Delivery's share of Script's net income - Gain on sale of land

Consolidated net income = $52,000 + $43,200 - $25,000 = $70,200

To prepare the journal entries for Post Delivery Service under the fully adjusted equity method, the company would recognize its share of Script's net income and dividends as well as eliminating any intra-group profits from the land sale. Relevant accounts would be 'Investment in Script Real Estate', 'Equity in Subsidiary Income', and 'Gain on Land Sale'.

For the consolidation entries, we need to eliminate the intra-group land sale, adjust for the noncontrolling interest's share of Script's net income, and eliminate the equity income recorded by Post Delivery from its investment in Script.

Answer 2

a) Consolidated Net Income

When preparing consolidated Net Income, We add each and every line item on a Parent's financial statements with the same line item on the Subsidiary's financial statement and adjust line items like revenue ( intra-group sale) , cost of goods sold ( unrealized profits) , other incomes ( dividends received) and expenses (depreciation on profits) .

b) JOURNAL ENTRIES

Debit Common stock $ 280,000 Debit Retained Earnings $ 95,000 Credit investment $ 300,000 Credit Non_Controlling interest( N . C . I ) $ 75,000

c) Debit Service Revenue $ 21,000,Credit Service fee $ 21,000

Debit Gain or profits on sale of land $ 25,000 Credit Land $ 25,000

Debit Dividends received $ 8000, N . C . I $2000 Credit Dividends paid $ 10,000

Step-by-step explanation:

The question is incomplete, it lacks the financial statements to be consolidated.

Steps to Consolidated Statements

1 . Eliminate common transactions ( transactions like intra-group sale , dividends , etc . .)

2 . Consolidate the financial statements

b) we credit investment and if investment is greater than the total of common stock and retained earnings at 80% then we create equity represented by goodwill ( asset ) , if investment is less the we set off that amount in the retained earnings of the investing company. (Assuming investment = 80 % of total amount at acquisition .