P 7-38 Comprehensive Problem: Intercompany Transfers Rossman Corporation holds 75 percent of the common stocks of Schmid Distributors Inc., purchased on December 31, 20x1, for $2,340,000. At the date of acquisition, Schmid reported common stock with a par value of $1,000,000, additional paid-in capital of $1,350,000, and retained earnings of $620,000. The fair value of the non-controlling interest at acquisition was $780,000. The differential at acquisition was attributable to the following items:

Inventory (sold in 20x2) $30,000 Land 56,000 Goodwill 64,000 Total Differential $150,000

During 20x2, Rossman sold a plot of land that it had purchased several years before to Schmid at a gain of $23,000; Schmid continues to hold the land. In 20x6, Rossman and Schmid entered into a five-year contract under which Rossman provides management consulting services to Schmid on a continuing basis; Schmid pays Rossman a fixed fee of $80,000 per year for these services. At December 31, 20x8, Schmid owed Rossman $20,000 as the final 20x8 quarterly payment under the contract.

On January 2, 20x8, Rossman paid $250,000 to Schmid to purchase equipment that Schmid was then carrying at $290,000. Schmid had purchased that equipment on December 27, 20x2, for $435,000. The equipment is expected to have a total 15-year life and no salvage value. The amount of the differential assigned to goodwill has not been impaired.

At December 31, 20x8, trial balances for Rossman and Schmid appeared as follows:

As of December 31, 20x8, Schmid had declared but not yet paid its fourth-quarter dividend of $5,000. Both companies use straight-line depreciation and amortization. Rossman uses the fully adjusted equity method to account for its investment in Schmid.

Required: a. Compute the amount of the differential as of January 1, 20x8. b. Verify the balance in Rossmans Investment in Schmid Stock account as of December 31, 20x8. c. Present all elimination entries that would appear in a three-part consolidation worksheet as of December 31, 20x8. d. Prepare and complete the three-part worksheet for the preparation of consolidated financial statements for 20x8.

Schmid Distributors Inc. Debit Credit $38,000 89,400 218,900 Cash Current Receivables Inventory Investment in Schmid Stock Land Buildings & Equipment Cost of Goods Sold Depreciation & Amortization Other Expenses Dividends Declared Accumulated Depreciation Current Payables Bonds Payable Common Stock Additional Paid-In Capital Retained Earnings, January 1 Sales Rossman Corporation Debit Credit $50,700 101,800 286,000 2,974,000 400,000 2,400,000 2,193,000 202,000 1,381,000 50,000 $1,105,000 86,200 1,000,000 100,000 1,272,000 1,474,800 4,801,000 1,200,000 2,990,000 525,000 88,000 227,000 20,000 $420,000 76,300 200,000 1,000,000 1,350,000 1,400,000 985,000 (continued) Other Income or Loss Income from Schmid Total 90,000 35,000 109,500 $10,038,500 $10,038,500 $5,431,300 $5431,300