Problem 5-1 (LO 2) Eliminations, equity, 100%, bonds with straight-line. Since its 100% acquisition of Drew Corporation stock on December 31, 20X2, Justin Corporation has maintained its investment under the equity method. However, due to Drew’s earning potential, the price included a $40,000 payment for goodwill. At the time of the purchase, the fair value of Drew’s assets equaled their book value.

On January 2, 20X4, Drew Corporation issued 10-year, 9% bonds at a face value of

$50,000. The bonds pay interest each December 31. On January 2, 20X6, Justin Corporation purchased all of Drew Corporation’s outstanding bonds for $48,400. The discount is amortized on a straight-line basis. They have been included in Justin’s long-term investment in bonds account. Below are the trial balances of both companies on December 31, 20X6.

 

 

Justin Corporation

 

Drew Corporation

 

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                                71,100                   67,500

Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                  450,000                   75,000

Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                       200,000                   65,000

Investment in Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                        48,600

Plant and Equipment (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                             2,420,000                    196,000

Investment in Drew Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                 350,000

Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                  (275,000)                   (18,000)

Bonds Payable (9%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                                                            (50,000)

Common Stock, Justin ($10 par) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                     (1,000,000)

Paid-In Capital in Excess of Par, Justin . . . . . . . . . . . . . . . . . . . . . . . . . . .                              (750,000)

Retained Earnings, Justin, January 1, 20X6 . . . . . . . . . . . . . . . . . . . . . .                              (730,000)

Common Stock, Drew ($10 par) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                                                  (100,000)

Paid-In Capital in Excess of Par, Drew . . . . . . . . . . . . . . . . . . . . . . . . . . .                                                                     (130,000)

Retained Earnings, Drew, January 1, 20X6 . . . . . . . . . . . . . . . . . . . . . .                                                                 (80,000) Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                                                           (2,500,000)                (540,000)

Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                               1,000,000                405,000

Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                     720,000                105,000

Interest Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                               (4,700)

Interest Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                              0                       4,500

                      

Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                                            0                       0

                      

 

 

 

1.    Prepare the worksheet entries needed to eliminate the intercompany debt on December 31, 20X6.

2.    Prepare a consolidated income statement for the year ended December 31, 20X6.

Note: No worksheet is required.