Question
The balance sheets of Forest Company and Garden Company are presented below as at December 31, Year 8. The balance sheets of Forest Company and
The balance sheets of Forest Company and Garden Company are presented below as at December 31, Year 8.
The balance sheets of Forest Company and Garden Company are presented below as at December 31, Year 8.
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Additional Information
- Forest acquired 90% of Garden for $315,900 on July 1, Year 1, and accounts for its investment under the cost method. At that time, the shareholders equity of Garden amounted to $190,000, the accumulated amortization was $110,000, and the assets of Garden were undervalued by the following amounts:
Inventory | $ | 27,000 | ||
Buildings | $ | 25,000 | remaining life, 10 years | |
Patents | $ | 76,000 | remaining life, 8 years | |
- During Year 8, Forest reported net income of $56,000 and declared dividends of $40,000, whereas Garden reported net income of $78,000 and declared dividends of $65,000.
- During Years 2 to 7, goodwill impairment losses totalled $2,700. An impairment test conducted in Year 8 indicated a further loss of $7,900.
- Forest sells goods to Garden on a regular basis at a gross profit of 30%. During Year 8, these sales totalled $149,300. On January 1, Year 8, the inventory of Garden contained goods purchased from Forest amounting to $17,300, while the December 31, Year 8, inventory contained goods purchased from Forest amounting to $21,300.
- On August 1, Year 6, Garden sold land to Forest at a profit of $17,300. During Year 8, Forest sold one-quarter of the land to an unrelated company.
- Forests bonds have a par value of $100,000, pay interest annually on December 31 at a stated rate of 6%, and mature on December 31, Year 11. Forest incurs an effective interest cost of 8% on these bonds. They had a carrying amount of $93,376 on January 1, Year 8. On that date, Garden acquired $60,000 of these bonds on the open market at a cost of $57,968. Garden will earn an effective rate of return of 7% on them. Both companies use the effective-interest method to account for their bonds.
The Year 8 income statements of the two companies show the following with respect to bond interest.
Forest | Garden | |||||
Interest expense | $ | 7,470 | ||||
Interest revenue | $ | 4,058 | ||||
- Garden owes Forest $21,300 on open account on December 31, Year 8.
- Assume a 40% corporate tax rate and allocate bond gains (losses) between the two companies.
Required:
(a) Prepare the following statements:
(i) Consolidated balance sheet for the year 8(Amounts to be deducted should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to nearest dollar amount. The balance sheet total may vary due to rounding.)
(ii) Consolidated retained earnings statement for the year 8. (Input all values as positive numbers. Do not round intermediate calculations and round your final answers to nearest dollar amount. Omit $ sign in your response.)
Forest Company | ||
Consolidated Retained Earnings Statement | ||
Year 8 | ||
(Click to select) Retained earnings, Jan. 1 Retained earnings, Dec. 31 | $ | |
(Click to select) Add: Net income Less: Net income | ||
(Click to select) Add: Dividends Less: Dividends | ||
(Click to select) Retained earnings, Jan. 1 Retained earnings, Dec. 31 | $ | |
(b) Prepare the Year 8 journal entries that would be made on the books of Forest if the equity method was used to account for the investment. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations and round your final answers to nearest dollar amount.)
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1
To record 90% of adjusted subsidiary income.
-
2
To record 90% of Garden's dividend of 65,000.
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3
To record the adjustments to parents net income.
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