Politan Company acquired an 80 percent interest in Soludan Company on January 1, 2010. Anyportion of Soludans business fair value in excess of its corresponding book value was assigned totrademarks. This intangible asset has subsequently undergone annual amortization based on a15-year life. Over the past two years, regular intra-entity inventory sales transpired between the twocompanies. No payment has yet been made on the latest transfer.Following are the individual financial statements for the two companies as well as consolidatedtotals for 2011:Politan Soludan ConsolidatedCompany Company TotalsSales . . . . . . . . . . . . . . . . . . . . . . . . $ (800,000) $(600,000) $(1,280,000)Cost of goods sold . . . . . . . . . . . . . 500,000 400,000 784,000Operating expenses . . . . . . . . . . . . . 100,000 100,000 202,500Income of Soludan . . . . . . . . . . . . . (80,000) 0 0Separate company net income . . . $ (280,000) $(100,000)Consolidated net income . . . . . . . . . $ (293,500)Noncontrolling interest inSoludan Companys income . .
. . . . 18,700Controlling interest inconsolidated net income . . . . . . $ (274,800)Retained earnings, 1/1/11 . . . . . . . . . $ (620,000) $(290,000) $ (611,600)Net income (above) . . . . . . . . . . . . . (280,000) (100,000) (274,800)Dividends paid . . . . . . . . . . . . . . . . . 70,000 20,000 70,000Retained earnings, 12/31/11 . . . . . $ (830,000) $(370,000) $ (816,400)Cash and receivables . . . . . . . . . . . . $ 290,000 $ 90,000 $ 360,000Inventory . . . . . . . . . . . . . . . . . . . . . 190,000 160,000 338,000Investment in Soludan Company . . . 390,000 0 0Land, buildings, and equipment . . . . 380,000 260,000 640,000Trademarks . . . . . . . . . . . . . . . . . . . . 0 0 32,500Total assets . . . . . . . . . . . . . . . . . . $ 1,250,000 $ 510,000 $ 1,370,500Liabilities . . . . . . . . . . . . . . . . . . . . . $ (270,000) $ (60,000) $ (310,000)Noncontrolling interest inSoludan Company . . . . . . . . . . . . . 0 0 (94,100)Common stock . . . . . . . . . . . . . . . . . (120,000) (80,000) (120,000)Additional paid-in capital . . . . . . . . . (30,000) 0 (30,000)Retained earnings (above) . . . . . . . . (830,000) (370,000) (816,400)Total liabilities and equities . . . . . . $(1,250,000) $(510,000) $(1,370,500)a.What method does Politan use to account for its investment in Soludan?b.What is the balance of the unrealized inventory gain deferred at the end of the currentperiod?c.What amount was originally allocated to the trademarks?d.What is the amount of the current year intra-entity inventory sales?e.Were the intra-entity inventory sales made upstream or downstream?f.What is the balance of the intra-entity liability at the end of the current year?g.What unrealized gain was deferred into the current year from the preceding period?h.The beginning consolidated Retained Earnings account shows a balance of $611,600 rather thanthe $620,000 reported by the parent. What creates this difference?i.How was the ending Noncontrolling Interest in Soludan Company computed?j.With a tax rate of 40 percent, what income tax journal entry is recorded if the companies preparea consolidated tax return?k.With a tax rate of 40 percent, what income tax journal entry is recorded if these two companiesprepare separate tax returns?Politan Company acquired an 80 percent interest in Soludan Company on January 1, 2010. Anyportion of Soludans business fair value in excess of its corresponding book value was assigned totrademarks. This intangible asset has subsequently undergone annual amortization based on a15-year life. Over the past two years, regular intra-entity inventory sales transpired between the twocompanies. No payment has yet been made on the latest transfer.Following are the individual financial statements for the two companies as well as consolidatedtotals for 2011:Politan Soludan ConsolidatedCompany Company TotalsSales . . . . . . . . . . . . . . . . . . . . . . . . $ (800,000) $(600,000) $(1,280,000)Cost of goods sold . . . . . . . . . . . . . 500,000 400,000 784,000Operating expenses . . . . . . . . . . . . . 100,000 100,000 202,500Income of Soludan . . . . . . . . . . . . . (80,000) 0 0Separate company net income . . . $ (280,000) $(100,000)Consolidated net income . . . . . . . . . $ (293,500)Noncontrolling interest inSoludan Companys income . . . . . . 18,700Controlling interest inconsolidated net income . . . . . . $ (274,800)Retained earnings, 1/1/11 . . . . . . . . . $ (620,000) $(290,000) $ (611,600)Net income (above) . . . . . . . . . . . . . (280,000) (100,000) (274,800)Dividends paid . . . . . . . . . . . . . . . . . 70,000 20,000 70,000Retained earnings, 12/31/11 . . . . . $ (830,000) $(370,000) $ (816,400)Cash and receivables . . . . . . . . . . . . $ 290,000 $ 90,000 $ 360,000Inventory . . . . . . . . . . . . . . . . . . . . . 190,000 160,000 338,000Investment in Soludan Company . . . 390,000 0 0Land, buildings, and equipment . . . . 380,000 260,000 640,000Trademarks . . . . . . . . . . . . . . . . . . . . 0 0 32,500Total assets . . . . . . . . . . . . . . . . . . $ 1,250,000 $ 510,000 $ 1,370,500Liabilities . . . . . . . . . . . . . . . . . . . . . $ (270,000) $ (60,000) $ (310,000)Noncontrolling interest inSoludan Company . . . . . . . . . . . . . 0 0 (94,100)Common stock . . . . . . . . . . . . . . . . . (120,000) (80,000) (120,000)Additional paid-in capital . . . . . . . . . (30,000) 0 (30,000)Retained earnings (above) . . . . . . . . (830,000) (370,000) (816,400)Total liabilities and equities . . . . . . $(1,250,000) $(510,000) $(1,370,500)a.What method does Politan use to account for its investment in Soludan?b.What is the balance of the unrealized inventory gain deferred at the end of the currentperiod?c.What amount was originally allocated to the trademarks?d.What is the amount of the current year intra-entity inventory sales?e.Were the intra-entity inventory sales made upstream or downstream?f.What is the balance of the intra-entity liability at the end of the current year?g.What unrealized gain was deferred into the current year from the preceding period?h.The beginning consolidated Retained Earnings account shows a balance of $611,600 rather thanthe $620,000 reported by the parent. What creates this difference?i.How was the ending Noncontrolling Interest in Soludan Company computed?j.With a tax rate of 40 percent, what income tax journal entry is recorded if the companies preparea consolidated tax return?k.With a tax rate of 40 percent, what income tax journal entry is recorded if these two companiesprepare separate tax returns?
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