Advanced Accounting 11th Edition by Paul Fischer,William Tayler, Rita Cheng

Exercise 7

Worksheet, three-level holding, intercompany merchandise, plant assets. Shelby Corporation purchases 90% of the outstanding stock of Borner Company on January 1, 2011, for $603,000 cash. At that time, Borner Company has the following stockholders' equity balances: common stock, $200,000; paid-in capital in excess of par, $80,000; and retained earnings, $300,000.
All book values approximate fair values except for the plant assets (undervalued by $50,000 and with an estimated remaining life of 10 years). Any remaining excess is goodwill.
DeNoma Company acquires a 60% interest in Shelby on January 1, 2013, for $750,000. At this time, Shelby has consolidated shareholders' equity of common stock, $500,000; paid-in capital in excess of par, $150,000; and controlling retained earnings, $500,000 (not including amortization of excess price applicable to investment in Borner).
At that time, it is also determined that Shelby's plant assets are undervalued by $50,000 and have a 10-year remaining life. Any remaining excess is goodwill.
Intercompany merchandise sales from Borner to Shelby for 2014 are (1) seller's goods in buyer's beginning inventory, $7,500; (2) sales during 2014, $125,000; (3) seller's goods in buyer's ending inventory, $10,000; and (4) gross profit on intercompany sales, 80%.
On January 1, 2013, Shelby sells plant assets with a cost of $80,000 and accumulated depreciation of $45,000 to DeNoma for $50,000. Remaining life on the date of sale is estimated to be five years.
Shelby and DeNoma use the simple equity method to account for their investments. The trial balances on December 31, 2014, are as follows:
Prepare the determination and distribution of excess schedule for Shelby's investment in Borner and DeNoma's investment in Shelby. Prepare the December 31, 2014, consolidated worksheet and income distribution schedules.
Suggestion: The determination and distribution of excess schedule must show an adjustment to Shelby's retained earnings for the amortization of excess applicable to Shelby's investment in Borner. [Hint (for consolidated balance sheet): The reduced retained earnings in the determination and distribution of excess schedule must be adjusted before eliminating the pro rata share of equity balances.]