Politan Company acquired an 80 percent interest in Soludan Company on January 1, 2014.. Any

portion of Soludan’s business fair value in excess of its corresponding book value was assigned totrademarks. This intangible asset has subsequently undergone annual amortization based on a

15-year life. Over the past two years, regular intra-entity inventory sales transpired between the two companies. No payment has yet been made on the latest transfer.

Following are the individual financial statements for the two companies as well as consolidated

totals for 2014:

 

Politan Co. Soludan Co. Consolidated Total

Sales . . . . . . . . . . . . . . . . . . . . . . . . $ (800,000) $(600,000) $(1,280,000)

Cost of goods sold . . . . . . . . . . . . . 500,000 400,000 784,000

Operating expenses . . . . . . . . . . . . . 100,000 100,000 202,500

Income of Soludan . . . . . . . . . . . . . (80,000) –0– –0–

Separate company net income . . . $ (280,000) $(100,000)

Consolidated net income . . . . . . . . . $ (293,500)

Noncontrolling interest in

Soludan Company’s income . . . . . . 18,700

Controlling interest in

consolidated 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 70,000

Retained earnings, 12/31/11 . . . . . $ (830,000) $(370,000) $ (816,400)

Cash and receivables . . . . . . . . . . . . $ 290,000 $ 90,000 $ 360,000

Inventory . . . . . . . . . . . . . . . . . . . . . 190,000 160,000 338,000

Investment in Soludan Company . . . 390,000 –0– –0–

Land, buildings, and equipment . . . . 380,000 260,000 640,000

Trademarks . . . . . . . . . . . . . . . . . . . . –0– –0– 32,500

Total assets . . . . . . . . . . . . . . . . . . $ 1,250,000 $ 510,000 $ 1,370,500

Liabilities . . . . . . . . . . . . . . . . . . . . . $ (270,000) $ (60,000) $ (310,000)

Noncontrolling interest in

Soludan 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 current

period?

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 than

the $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 prepare

a consolidated tax return?

k.With a tax rate of 40 percent, what income tax journal entry is recorded if these two companies

prepare separate tax returns?