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Pepsodon-Sensodon Consolidation Analysis

The document provides trial balance information for Pepsodon Company and its wholly owned subsidiary Sensodon Company for the years ending December 31, 2X19 and December 31, 2X20. It also provides trial balance information for Purple Company and its wholly owned subsidiary Scarlet Company for the year ending December 31, 2X19. The document lists requirements to prepare journal entries, reconcile accounts, prepare eliminating entries, and consolidation worksheets for each case using the equity method or carrying the investment at cost.

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Ibnu Wibowo
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23 views3 pages

Pepsodon-Sensodon Consolidation Analysis

The document provides trial balance information for Pepsodon Company and its wholly owned subsidiary Sensodon Company for the years ending December 31, 2X19 and December 31, 2X20. It also provides trial balance information for Purple Company and its wholly owned subsidiary Scarlet Company for the year ending December 31, 2X19. The document lists requirements to prepare journal entries, reconcile accounts, prepare eliminating entries, and consolidation worksheets for each case using the equity method or carrying the investment at cost.

Uploaded by

Ibnu Wibowo
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Advance

Financial Accounting 1
Consolidation of Wholly Owned Subsidiaries with No Differential
Teaching Assistant Team

Problem I: Consolidated Worksheet at End of the First Year of Ownership (Equity Method)

Pepsodon Company acquired 100 percent of Sensodon Company’s outstanding common stock for
$750,000 on January 1, 2X19, when the book value of Sensodon’s net assets was equal to
$750,000. Peanut uses the equity method to account for investments. Trial balance data for
Pepsodon and Sensodon as of December 31, 2X19, are as follows:


Pepsodon Company Sensodon Company
Debit Credit Debit Credit
Cash 325,000 200,000
Account Receivable 412,500 162,500
Inventory 500,000 187,500
Investment in Sensodon Company 887,500 -
Land 500,000 250,000
Building & Equipment 1,750,000 500,000
Cost of Goods Sold 500,000 312,500
Depreciation expense 125,000 25,000
S&A Expense 562,500 100,000
Dividend Declared 250,000 50,000
Accumulated Depreciation 1,125,000 50,000
Account Payable 187,500 150,000
Bonds Payable 500,000 212,500
Common Stock 1,250,000 500,000
Retain Earnings 562,500 250,000
Sales 2,000,000 625,000
Income from Sensodon Company 187,500 -
Total 5,812,500 5,812,500 1,787,500 1,787,500


Required
1. Prepare journal entry made by Pepsodon to record acquisition on 1 January 2X19!
2. Prepare journal entry made by Pepsodon related to investment on Sensodon during 2X19
using equity method!
3. Reconcile investment account on Pepsodon book to equity section on Sensodon Book!
4. Prepare eliminating entries on 31 December 2X19!
5. Prepare consolidation worksheet as of 31 December 2X19!





Advance Financial Accounting 1
Consolidation of Wholly Owned Subsidiaries with No Differential
Teaching Assistant Team

Problem II: Consolidated Worksheet at End of the Second Year of Ownership (Equity Method)

Pepsodon Company acquired 100 percent of Snoopy Company’s outstanding common stock for
$750,000 on January 1, 2X19, when the book value of Snoopy’s net assets was equal to $750,000.
Problem I summarizes the first year of Pepsodon’s ownership of Sensodon. Pepsodon uses the
equity method to account for investments. The following trial balance summarizes the financial
position and operations for Peanut and Snoopy as of December 31, 2X20:


Pepsodon Company Sensodon Company
Debit Credit Debit Credit
Cash 575,000 187,500
Account Receivable 475,000 200,000
Inventory 450,000 250,000
Investment in Sensodon Company 1,012,500 -
Land 500,000 250,000
Building & Equipment 1,750,000 500,000
Cost of Goods Sold 675,000 375,000
Depreciation expense 125,000 25,000
S&A Expense 575,000 150,000
Dividend Declared 562,500 75,000
Accumulated Depreciation 1,250,000 75,000
Account Payable 187,500 87,500
Bonds Payable 375,000 212,500
Common Stock 1,250,000 500,000
Retain Earnings 1,312,500 387,500
Sales 2,125,000 750,000
Income from Sensodon Company 200,000 -
Total 6,700,000 6,700,000 2,012,500 2,012,500


Required
1. Prepare journal entry made by Pepsodon related to investment on Sensodon during 2X20
using Equity method!
2. Reconcile investment account on Pepsodon book to equity section on Sensodon Book!
3. Prepare eliminating entries on 31 December 2X20!
4. Prepare consolidation worksheet as of 31 December 2X20!




Advance Financial Accounting 1
Consolidation of Wholly Owned Subsidiaries with No Differential
Teaching Assistant Team

Problem III: Consolidated Worksheet at End of the First Year of Ownership (Investment Carried at
Cost)

Purple Company acquired 100 percent of Scarlet Company’s outstanding common stock for
$370,000 on January 1, 2X19, when the book value of Scarlet’s net assets was equal to $370,000.
Purple chooses to carry the investment in Snoopy at cost because the investment will be
consolidated. Trial balance data for Purple and Scarlet as of December 31, 2X19, are as follows:


Purple Company Scarlet Company
Debit Credit Debit Credit
Cash 122,000 46,000
Accounts Receivable 140,000 60,000
Inventory 190,000 120,000
Land 250,000 125,000
Building & Equipment 875,000 250,000
Investment in Scarlets Stock 370,000 -
COGS 250,000 155,000
Depreciation Expense 65,000 12,000
S&A Expenses 280,000 50,000
Dividends Declared 80,000 25,000
Accumulated Depreciation 565,000 36,000
Accounts Payable 77,000 27,000
Bonds Payable 250,000 100,000
Common Stock 625,000 250,000
Retained Earnings 280,000 120,000
Sales 800,000 310,000
Dividend Income 25,000 -
Total 2,622,000 2,622,000 843,000 843,000


Required
1. Prepare journal entry made by Purple to record acquisition on 1 January 2X19 and journal
entry related to investment on Scarlet during 2X19 using Cost Method!
2. Prepare eliminating entries on 31 December 2X19!
3. Prepare a consolidation worksheet as of 31 December 2X19!

Common questions

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Under the equity method, the parent company records its investment in the subsidiary at cost, and subsequently adjusts this investment for the parent's share of the subsidiary's profits or losses. The parent's share of the subsidiary's net income is recorded as income on the parent's income statement, increasing the investment account, and any dividends received from the subsidiary decrease the investment account .

When a subsidiary declares dividends, the distribution reduces the carrying amount of the investment in the subsidiary on the parent company’s balance sheet under the equity method. It is recorded as a dividend receivable and reduces the investment account since it represents a return on investment from retained earnings of the subsidiary that had been previously included in the parent's consolidated earnings .

In the first year of ownership, when using the equity method, Pepsodon Company would need to make journal entries that include: recording the acquisition cost of the subsidiary at $750,000, recognizing income from the subsidiary, and reflecting dividends received from the subsidiary as reductions in the investment account. The eliminating entries would remove any intercompany transactions to prevent double-counting when consolidating financial statements .

Eliminating entries are essential in the consolidation process as they remove the effects of intercompany transactions that could otherwise be double-counted. These entries ensure that the consolidated financial statements present a clear and accurate picture of the financial position and performance of the single economic entity formed by the parent company and its subsidiary. Examples of eliminating entries include the removal of intercompany sales, receivables, payables, and profits .

Reconciliation ensures that the parent’s investment account consistently reflects the subsidiary’s equity, adjusted for intercompany transactions, income, and dividends. This alignment guarantees that the consolidated financial statements accurately portray the unified financial position, avoiding potential discrepancies or misstatements by capturing all necessary financial activities between the two entities .

The book value of net assets is significant as it represents the fair value of the acquired subsidiary’s assets and liabilities at the time of acquisition. It must match the acquisition price to ensure there is no goodwill or be certain that purchased goodwill is recognized accurately. When these figures align, it indicates that the purchase consideration precisely reflects the net assets' value, simplifying the recording process under the equity method and ensuring no additional adjustments for excess purchase price or deficits .

A company might use the cost method if it does not have significant influence over the subsidiary, which usually means owning less than 20% of the voting shares. This method is simpler as it doesn’t require adjusting for the subsidiary's profits or losses, making it preferable for passive investments. In contrast, if the subsidiary is wholly owned, the choice between methods might be influenced by internal accounting policies and strategic objectives in reflecting financial performance .

When carrying an investment at cost, the parent company records the investment at the original cost and does not adjust for changes in the subsidiary's equity, except for impairment losses. In contrast, under the equity method, the parent adjusts the investment for its share of the subsidiary’s net income and dividends. The cost method is typically used when the parent does not exert significant influence, while the equity method is used when it does .

The primary challenges include accurately eliminating intercompany transactions, such as sales and dividends, ensuring correct recognition of income from subsidiaries, and adjusting entries to align with the equity method if applicable. Considerations also include currency exchange rates, changes in subsidiary equity, adjustments in asset valuations, and compliance with accounting standards. The consolidation worksheet must provide a clear representation of combined entity finances without overstating or understating values .

Changes in inventory and accounts receivable impact consolidated financial statements by altering the working capital and liquidity ratios. In the second year, as seen in the trial balances for Pepsodon and Sensodon, a decrease in inventory or an increase in accounts receivable could either inflate or deflate net income due to adjustments necessary for intercompany sales and collections. These changes require careful adjustment to correctly reflect intercompany eliminations and ensure accurate representation of revenue and expenses .

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