Fred, Inc., and Herman formed a business combination on January 1, 2016, when Fred acquired a 60 percent interest in Herman’s for $312,000 in cash. The book value of Herman’s assets and liabilities on that day totaled $300,000 and the fair value of the noncontrolling interest was $208,000. Patents being held by Herman (with a 12-year remaining life) were undervalued by $90,000 within the company’s financial records and a customer list (10-year life) worth $130,000 was also recognized as part of the acquisition-date fair value.
Intra-entity inventory transfers occur regularly between the two companies. Merchandise carried over from one year to the next is always sold in the subsequent period.
Fred had not paid for half of the 2018 inventory transfers by year-end.
On January 1, 2017, Fred sold $15,000 in land to Herman for $22,000. Herman is still holding this land.
On January 1, 2018, Herman acquired $20,000 (face value) of Fred’s bonds in the open market.
These bonds had an 8 percent cash interest rate. On the date of repurchase, the liability was shown within Fred’s records at $21,386, indicating an effective yield of 6 percent. Herman’s acquisition price was $18,732 based on an effective interest rate of 10 percent.
Herman indicated earning a net income of $25,000 within its 2018 financial statements.
The subsidiary also reported a beginning Retained Earnings balance of $300,000, dividends of $4,000, and of $100,000. Herman has not issued any additional since its takeover. The parent company has applied the equity method to record its investment in Herman.
a. Prepare consolidation worksheet adjustments for 2018.
b. Calculate the amount of consolidated net income attributable to the noncontrolling interest for
2018. In addition, determine the ending 2018 balance for noncontrolling interest in the consolidated balance sheet.
c. Determine the consolidation worksheet adjustments needed in 2019 in connection with the intra-entity bonds.
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