Maurice Tutor
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Exercise 7 (LO 3) Cost method, first year, eliminations, statements. (Note: Read carefully, as this is not the same as Exercise 3 or 5.) 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 cost 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
250,000 |
|
|
Current Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
(60,000) |
(40,000) |
|
Common Stock ($10 par) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
(300,000) |
(100,000) |
|
|
|
(continued) |
|
Dividend Income (from Sultan Company) . . . . . . . . . . . . . . . . . . . . . . . . . Dividends Declared . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
(4,000) |
|
5,000 |
|
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
0 |
|
0 |
1. If you did not solve Exercise 3 or 5, prepare a determination and distribution of excess schedule for the investment (a value analysis is not needed).
2. Prepare all the eliminations and adjustments that would be made on the 20X1 consolidated worksheet.
3. If you did not solve Exercise 3 or 5, prepare the 20X1 consolidated income statement and its related income distribution schedules.
4. If you did not solve Exercise 3 or 5, prepare the 20X1 statement of retained earnings.
5. If you did not solve Exercise 3 or 5, prepare the 20X1 consolidated balance sheet.