Consolidated Net Income with Intercompany Transfers

In its 20X7 consolidated income statement, Bower Development Company reported consolidated net income of $961,000 and $39,000 of income assigned to the 30 percent noncontrolling interest in its only subsidiary, Subsidence Mining, Inc. During the year, Subsidence had sold a previously mined parcel of land to Bower for a new housing development; the sales price to Bower was $500,000, and the land had a carrying amount at the time of sale of $560,000. At the beginning of the previous year, Bower had sold excavation and grading equipment to Subsidence for $240,000; the equipment had a remaining life of six years as of the date of sale and a book value of $210,000. The equipment originally had cost $350,000 when Bower purchased it on January 2, 20X2. The equipment never was expected to have any salvage value.

Bower had acquired 70 percent of the voting shares of Subsidence eight years earlier when the fair value of its net assets was $200,000 higher than book value, and the fair value of the noncontrolling interest was $60,000 more than a proportionate share of the book value of Subsidence’s net assets. All the excess over the book value was attributable to intangible assets with a remaining life of 10 years from the date of combination. Both parent and subsidiary use straight-line amortization and depreciation. Assume Bower uses the fully adjusted equity method.

Required

a. Present the journal entry made by Bower to record the sale of equipment in 20X6 to Subsidence.

b. Present all elimination entries related to the intercompany transfers of land and equipment that should appear in the consolidation worksheet used to prepare a complete set of consolidated financial statements for 20X7.

c. Compute Subsidence’s 20X7 reported net income.

d. Compute Bower’s 20X7 income from its own separate operations, excluding any investment income from its investment in Subsidence Mining.