Equity in Net Income and Eliminating Entries-Intercompany Asset Transfers and Services
On January 2, 2015, Pohang Company acquired 80 percent of Suro Corporation's voting common stock for $1.25 billion. The fair value of the non-controlling interest at the date of acquisition was $300 million. The $50 million excess of acquisition cost and non-controlling interest over the book value of Suro was attributed entirely to goodwill. Suro reported net income of $150 million and $200 million in 2015 and 2016, respectively, paying out 40 percent of each period's earnings in dividends. Pohang reports its investment in Suro using the complete equity method. There is no goodwill impairment in 2015 or 2016. Information on intercompany transactions follows:
1. On March 5, 2015, Suro sold a parcel of land to Pohang for $60 million; the land originally cost $45 million. Pohang continues to hold the land.
2. During 2016, Pohang and Suro recorded intercompany merchandise sales of $350 million, an amount equal to cost plus 25 percent. Suro's beginning inventory included $50 million of merchandise purchased from Pohang in prior years, while Pohang's ending inventory included $80 million of merchandise purchased from Suro.
3. On January 2, 2016, Suro sold a piece of machinery to Pohang for $60 million and recorded a gain of $25 million. Accumulated depreciation on the machinery amounted to $40 million at January 2. The machinery is being depreciated by the straight-line method over its remaining life of five years.
4. Pohang billed Suro $20 million for computer services during the year. The costs incurred by Pohang in supplying these services amounted to $15 million. On December 31, 2016, the unpaid portion of these intercompany services amounted to $3 million.
Required
(a) Prepare a schedule to compute Pohang's equity in net income of Suro and the non-controlling interest in consolidated net income for 2016.
Suro's net income
Intercompany profits in Suro's beginning inventory (downstream sales)
Intercompany profits in Pohang's ending. inventory (upstream sales)
Unconfirmed gain on upstream intercompany sale of machinery
(b) Prepare the working paper eliminations to consolidate the accounts of Pohang and Suro at December 31, 2016.
(c) Answer Equity in net income from Suro Accounts receivable Dividends - Suro Cash
Investment in Suro
To eliminate the current year equity method entries made by Pohang.
To eliminate the unconfirmed gain from the prior year upstream transfer of land.
Answer Sales Cash Accounts receivable Stockholders' equity - Suro
To eliminate intercompany merchandise sales.
Answer Cost of goods sold Cash Inventory Accounts receivable
To eliminate unconfirmed intercompany profit on downstream sales from beginning inventory.
To eliminate unconfirmed intercompany profit on upstream sales from ending inventory.
Answer Machinery Accounts receivable Cash Depreciation expense
To eliminate the gain on the intercompany sale of machinery.
To eliminate excess depreciation on the machinery acquired from Suro.
To restate the machinery and accumulated depreciation accounts to their original acquisition cost basis.
To eliminate intercompany revenue and expense.
To eliminate intercompany receivables and payables.
To eliminate the remaining stockholders' equity of Suro against the investment.
To record the change in the non-controlling interest during 2016.