Problem:
On January 2, 2011, Patten Company purchased a 90% interest in Sterling Company for $1,400,000. At that time Sterling Company had capital stock outstanding of $800,000 and retained earnings of $425,000. The difference between cost and book value was assigned to the following assets:
Inventory $41,667
Plant and equipment (net) 200,000
Excess of cost over fair value 88,889
The inventory was sold in 2011. The plant and equipment had a remaining useful life of 12 years on January 2, 2011.
During 2002 Sterling sold merchandise with a cost of $950,000 to Patten at a 20% markup above cost. At December 31, 2011, Patten still had merchandise in its inventory that it purchased from Sterling for $576,000.
In 2002, Sterling Company reported net income of $410,000 and declared no dividends.
Required:
Question 1: Prepare in general journal form all entries necessary on the consolidated financial statements workpaper to eliminate the effects of the intercompany sales, to eliminate the investment account, and to assign the difference between cost and book value.
Question 2: Assume that Patten Company reports net income of $2,000,000 from its independent operations. Calculate consolidated net income.
Question 3: Calculate noncontrolling interest in combined income.