Problem 1

Pale Company owns 90% of the outstanding common stock of Shale Company. On January 1, 2014, Shale Company sold equipment to Pale Company for $300,000. Shale Company had purchased the equipment for $450,000 on January 1, 2006 and has been depreciating it over a 10 year life by the straight-line method. The management of Pale Company estimated that the equipment had a remaining life of 5 years on January 1, 2014. In 2014, Pale Company reported $225,000 and Shale Company reported $150,000 in net income from their independent operations.

Required:

A. Prepare in general journal form the workpaper entries relating to the intercompany sale of equipment that are necessary in the December 31, 2014 and 2015 consolidated statements workpapers. Pale Company uses the cost method to record its investment in Shale Company.

B. Calculate equity in subsidiary income for 2014 and noncontrolling interest in net income for 2014.

Problem 2

On January 1, 2014, Pharma Company purchased equipment from its 80%-owned subsidiary for $2,400,000. On the date of the sale, the carrying value of the equipment on the books of the subsidiary company was $1,800,000. The equipment had a remaining useful life of six years on January 2014. On January 1, 2015, Pharma Company sold the equipment to an outside party for $2,200,000.

Required:

A. Prepare, in general journal form, the entries necessary in 2014 and 2015 on the books of Pharma Company to account for the purchase and sale of the equipment.

B. Determine the consolidated gain or loss on the sale of the equipment and prepare, in general journal form, the entry necessary on the December 31, 2015 consolidated statements workpaper to properly reflect this gain or loss.

Problem 3

Prince Company owns 104,000 of the 130,000 shares outstanding of Serf Corporation. Serf Corporation sold equipment to Prince Company on January 1, 2014 for $740,000. The equipment was originally purchased by Serf Corporation on January 1, 2013 for $1,280,000 and at that time its estimated depreciable life was 8 years. The equipment is estimated to have a remaining useful life of four years on January 1, 2014. Both companies use the straight-line method to depreciate equipment. In 2015 Prince Company reported net income from its independent operations of $3,270,000, and Serf Corporation reported net income of $820,000 and declared dividends of $60,000. Prince Company uses the cost method to record the investment in Serf Company.

Required:

A. Prepare, in general journal form, the workpaper entries relating to the intercompany sale of equipment that are necessary in the December 31, 2015 consolidated financial statements workpapers.

B. Calculate the amount of noncontrolling interest to be deducted from consolidated net income in the consolidated income statement for 2015.

C. Calculate controlling interest in consolidated net income for 2015.