Maurice Tutor
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Exercise 3 (LO 2) Equity method, first year, eliminations, statements. Pepper Company acquires an 80% interest in Sultan Company for $250,000 in cash on January 1, 20X1, when Sultan Company has the following balance sheet:
|
Assets |
|
Liabilities and Equity |
|
|
Current assets . . . . . . . . . . . . . . |
$100,000 |
Current liabilities . . . . . . . . . . . . . . . |
$ 50,000 |
|
Depreciable fixed assets . . . . . . |
200,000 |
Common stock ($10 par). . . . . . . . . |
100,000 |
|
|
|
Retained earnings . . . . . . . . . . . . . . |
150,000 |
|
Total assets. . . . . . . . . . . . . . . |
$300,000 |
Total liabilities and equity . . . . . . |
$300,000 |
Any excess of the price paid over book value is attributable only to the fixed assets, which have a 10-year remaining life. Pepper Company uses the simple equity method to record its investment in Sultan Company.
The following trial balances of the two companies are prepared on December 31, 20X1:
|
|
Pepper |
|
Sultan |
|
Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
60,000 |
|
130,000 |
|
Depreciable Fixed Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
400,000 |
|
200,000 |
|
Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
(106,000) |
|
(20,000) |
|
Investment in Sultan Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
266,000 |
|
|
|
Current Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
(60,000) |
|
(40,000) |
|
Common Stock ($10 par) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
(300,000) |
|
(100,000) |
|
Retained Earnings, January 1, 20X1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
(200,000) |
|
(150,000) |
|
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
(150,000) |
|
(100,000) |
|
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
110,000 |
|
75,000 |
|
Subsidiary Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
(20,000) |
|
|
|
Dividends Declared . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
|
|
5,000 |
|
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
0 |
|
0 |
1. Prepare a determination and distribution of excess schedule (a value analysis is not needed) for the investment.
2. Prepare all the eliminations and adjustments that would be made on the 20X1 consolidated worksheet.
3. Prepare the 20X1 consolidated income statement and its related income distribution schedules.
4. Prepare the 20X1 statement of retained earnings.
5. Prepare the 20X1 consolidated balance sheet.