Let's break down the problem step by step! ### **Step 1: Understanding the Scenario** - **Gibson** owns **60%** of **Davis** as of April 1, 2024, for $528,000. - **Equipment owned by Davis** was overvalued by $30,000 (will cause annual excess depreciation). - **Fair value of noncontrolling interest (NCI)** (40%) is $352,000. - **Davis declared $40,000 dividends** on Nov 1, 2024. - **Davis earned income evenly through the year.** --- ## **a. Prepare a Consolidated Income Statement for 2024** ### **1. Combine Revenues and Expenses** #### **Sales** - Gibson: $600,000 - Davis: $300,000 - **Combined:** $900,000 #### **Cost of Goods Sold** - Gibson: $300,000 - Davis: $140,000 - **Combined:** $440,000 #### **Operating Expenses** - Gibson: $174,000 - Davis: $60,000 - **Combined:** $234,000 #### **Dividend Income** - Gibson: $24,000 (from Davis; **eliminate** in consolidation) --- ### **2. Adjust for Intra-group Transactions** - **Eliminate Gibson’s Dividend Income**: This is an internal transfer. Remove $24,000 from consolidated income. --- ### **3. Adjust for Excess Depreciation (Equipment Overvaluation)** - Overvaluation: $30,000 (5-year life) - Annual Excess Depreciation: $30,000 / 5 = **$6,000** - For 2024, since acquisition was on April 1, only **9 months** (Apr–Dec): $6,000 × (9/12) = **$4,500** --- ### **4. Consolidated Net Income Calculation** **Combined Net Income (before adjustments):** - Gibson: $(150,000) - Davis: $100,000 - **Total:** $(50,000)$ **Adjustments:** - Remove dividend income: +$24,000 - Less excess depreciation: -$4,500 **Consolidated Net Income:** = $(50,000) + $24,000 - $4,500 = **$(30,500)** --- #### **Allocate Net Income to Parent & NCI** - **Davis' adjusted net income:** Davis net income: $100,000 Less excess depreciation: $(4,500)$ Adjusted: $95,500 - **Gibson’s share (60%)**: $95,500 × 60% = $57,300 - **NCI’s share (40%)**: $95,500 × 40% = $38,200 - **Gibson’s consolidated net income:** - Gibson’s own: $(150,000)$ - Add share of Davis: $57,300 - Add back dividend eliminated: $24,000 - **Total to Gibson:** $(150,000) + 57,300 + 24,000 = $(68,700)$ - **NCI portion:** $38,200 --- ### **Consolidated Income Statement for 2024** | Account | Amount | |-----------------------|------------| | Sales | $900,000 | | Cost of goods sold | $440,000 | | Operating expenses | $234,000 | | Excess depreciation | $4,500 | | Net income | $(30,500) | | Less: Noncontrolling interest share | $38,200 | | Net income to Gibson | $(68,700) | --- ## **b. Consolidated Balances (as of Dec 31, 2024)** ### **1. Goodwill Calculation** **Purchase price for 60%:** $528,000 **Fair value of NCI (40%):** $352,000 **Total FV of Davis:** $528,000 + $352,000 = $880,000 **Net identifiable assets of Davis at acquisition:** - Equity at acquisition: - Common stock: $340,000 - Retained earnings (1/1/24): $400,000 - **Total:** $740,000 - **Adjust for equipment overvaluation:** -$30,000 - **Net assets:** $740,000 + $30,000 = $770,000 **Goodwill:** $880,000 (FV) - $770,000 (net assets) = **$110,000** --- ### **2. Equipment (net)** - Gibson: $400,000 - Davis: $400,000 (but overvalued by $30,000 at acquisition, of which $4,500 has been depreciated in 2024; so $30,000 - $4,500 = $25,500 remains) - **Consolidated equipment:** $400,000 (Gibson) + $400,000 (Davis) - $25,500 (remaining overvaluation) = **$774,500** --- ### **3. Buildings (net)** - Gibson: $524,000 - Davis: $600,000 - **Consolidated:** $1,124,000 --- ### **4. Common Stock** - Only **parent’s (Gibson’s) stock** is shown: **$630,000** --- ### **5. Dividends Declared** - Eliminate intra-group dividends: - Gibson declared $80,000 - Davis declared $40,000 (eliminate from consolidated; only NCI's share is external) - NCI share of Davis dividend: $40,000 × 40% = $16,000 - **Consolidated dividends declared:** $80,000 (Gibson) + $16,000 (NCI share of Davis) = **$96,000** --- ## **Summary Table** | Account | Consolidated Balance | |---------------------|---------------------| | **Goodwill** | $110,000 | | **Equipment (net)** | $774,500 | | **Common stock** | $630,000 | | **Buildings (net)** | $1,124,000 | | **Dividends declared** | $96,000 | --- ### **If you need calculations for other accounts, let me know!** #### If you need the detailed steps for any of the calculations or more explanation, I'd be happy to break them down further!