Pannier Company is the parent company that owns an 80% interest in Jadestar Company. The interest was acquired at book value,and the simple equity method is used to record the ownership interest. The trial balances of the two companies on December 31, 2016, were as followed: Pannier Co. Jadestar Co. Cash..................................................................................................... 258,000 100,000 Inventory............................................................................................. 150,000 40,000 Other Current Assets......................................................................... 50,000 160,000 Investment in Jadestar....................................................................... 316,000 Plant and Equipment......................................................................... 650,000 500,000 Accumulated Depreciation............................................................... (300,000) (200,000) Current Liabilities.............................................................................. (40,000) (5,000) Long-Term Debt................................................................................. (200,000) Common Stock(par)........................................................................... (300,000) (100,000) Retained Earnings.............................................................................. (746,000) (285,000) Sales..................................................................................................... (150,000) (170,000) Cost of Goods Sold............................................................................. 90,000 130,000 Expenses.............................................................................................. 30,000 10,000 Interest Expense................................................................................. 20,000 Subsidiary Income.............................................................................. (8,000) Totals................................................................................................ 0 0 As the year ended, Pannier was planning to transfer a major piece of equipment to Jadestar. The equipment was just purchased by Pannier and is included in it's inventory account. The equipment cost Pannier $100,000 and would be transfered to Jadestar for $125,000. There are two options as follows: a.) Sell the equipment to Jadestar for $125,000 and finance it with a 5 year, 10% interest installment note. b.) Lease the equipment to Jadestar on a 5-year lease requiring payments of $29,977 in advance. 1. Make the journal entries for both companies if the intercompany sale was consummated on Dec. 31. 2. Prepare a consolidated income statement and balance sheet for the company for 2016. (Note: The effect of the equipment sale is not included in the trial balance) 3. Make the journal entries for both companies if the intercompany lease was executed on Dec. 31. 4. If the lease were used, how would the consolidated statements differ from those in part (2)?

Problem 5-3 Common Information Ownership Interest 80.00% Number of Shares Cash Market Price per Share Total Price Paid 0 Company Implied Fair Parent Price Value NCI Value Company Value Value Analysis Price Paid Fair Value of Net Assets Excluding Goodwill Goodwill Gain on Acquisition NCI Determination and Distribution of Excess Schedule Parent Price Fair Value of Subsidiary Less Book Value of Interest Acquired Common Stock Paid in Excess Retained Earnings Total Equity Interest Acquired Book Value Excess of Cost over Book Value Worksheet Distribution Accounts Adjusted Total 0 Cost to Equity Conversion Subsidiary RE on Worksheet Subsidiary RE on Purchase Date Increase (Decrease) Ownership Interest % Adjustment to Investment Account Intercompany fixed asset profit deferral Parent Original profit Year of sale Realized in prior years Balance, start of year Realized in current year Income distribution schedules: Subsidiary: Internally generated net income Sub DR CR Total NCI share Controlling share Parent Internally generated net income Controlling share of subsidiary Total Cash Accounts receivable Interest Receivable Inventory Investment in Appliance Outlets Investment in 11% Bonds Investment in Mortgage Property, Plant, and Equipment Accumulated depreciation. Goodwill Accounts Payable Interest Payable Bond Payable Discount on Bonds Payable Mortgage Payable Common stock -General Appliances Paid in Capital in Excess of Par--General Appliances Retained Earnings--General Appliances General Appliances 404,486 752,500 9,625 1,950,000 1,700,000 254,000 175,000 9,000,000 (1,695,000) (670,000) (18,333) (2,000,000) 10,470 900,000 2,950,000 (940,000) (80,000) (9,625) (500,000) 12,000 (175,000) (3,200,000) (4,550,000) (1,011,123) Common Stock--Appliance Outlets Paid in Capital in Excess of Par--Appliance Outlets Retained earnings- Appliance Outlets Sales Gain on Sale of Building Interest Income Appliance Outlets 72,625 105,000 (800,000) (625,000) (770,000) (9,800,000) (27,500) (36,125) (3,000,000) Dividend Income Cost of Goods Sold Depreciation Expense Interest Expense (48,000) 4,940,000 717,000 223,000 1,700,000 95,950 67,544 Other Expenses Dividends Declared Totals Consolidated net income NCI share Controlling share NCI Controlling retained earnings Totals 2,600,000 320,000 0 936,506 60,000 0 Eliminations and Adjustments: Eliminations Dr Cr Consol Net Inc. NCI Control. R.E. Consol. Bal. Sht