Penguin purchased 75% of Star on January 1, 2015 for $2,200,000. The FV of the noncontrolling interests was 700,000. The book value of Star’s equity was $2,300,000 at the time. Penguin uses the equity method to account for its investment in Star. The excess of investment cost over book value was allocated as follows:

Equipment (20-year life) $130,000

Customer list (10-year life) 184,000

Patent (10-year life) 147,000

Goodwill 139,000

Total $600,000

Star regularly sells merchandise to Penguin. In 2017, inter-company sales amounted to $50,100, with $16,300 of deferred profit remaining in ending inventory. Year-end inter-company receivables/payables amounted to $18,900.

In 2018, upstream inter-company sales amounted to $87,400 with $23,800 of deferred profit remaining in ending inventory. Year-end inter-company receivables/payables amounted to $37,500.

On January 2, 2018, Star sold equipment to Penguin for $60,000. The equipment had a cost of $80,000 and accumulated depreciation of $45,000. The remaining life of the equipment was estimated at 4 years.

Financial statements of Penguin and Star for the year ended December 31, 2018 are presented below.

	Penguin	Star
Sales revenue	$ 5,706,000	$1,833,500
Cost of goods sold	(4,003,800)	(1,110,650)
Gross profit	1,702,200	722,850
Operating expenses	(931,020)	(336,800)
Income (loss) from subsidiary	240,150	_________
Net Income	$ 1,011,330	$ 386,050
Retained Earnings, 1/1/18	$ 3,204,030	$ 980,010
Net income	1,011,330	386,050
Dividends	(154,690)	(42,520)
Retained Earnings, 12/31/18	$ 4,060,670	$1,323,540
Cash and receivables	$ 1,995,327.50	$1,067,340
Inventory	1,158,650	690,270
Equity investment	1,627,742.50
Property, plant & equipment (Net)	5,358,920	1,327,490
Total Assets	$10,140,640	$3,085,100
Accounts payable	$ 708,300	$ 311,210
Accrued liabilities	803,130	370,650
Notes payable	2,940,000	665,300
Common stock	860,940	183,950
Additional paid-in capital	767,600	230,450
Retained Earnings, 12/31/18	4,060,670	1,323,540
Total Liabilities and Equities	$10,140,640	$3,085,100

a. How was the income from subsidiary calculated by Penguin Company? What is the income attributable to NCI and how was it calculated?

b. Do a proof of the investment account and NCI account at 12/31/17 and 12/31/18 (what you did in part a only for the investment and NCI accounts). I am looking for you to tell me what comprises the balance in these accounts. Note: You do not have the beginning of the year balances, but you have all the information you would need to calculate them!

c. Prepare the entries required under the equity method on Penguin's pre-consolidation books for 2018.

d. Prepare the consolidation entries for 2018. Every CEADI entry is required to do this consolidation.

e. Prepare the consolidation spreadsheet. What is provided in the Excel document is the same as the information provided above. Add or delete rows if necessary to accommodate your solution/consolidation entries.

Answer rating: 100% (QA)

a The income from subsidiary was calculated by Penguin Company by adding together the sales revenue cost of goods sold and operating expenses The inco... View the full answer