Question

On January 1, 2014, Pert Company purchased 85% of the outstanding common stock of Sales Company for $350,000. On that date. Sales Company's stockholders' equity consisted of common stock, $100,000; other contributed capital, $40,000; and retained earnings, $140,000. Pert Company paid more than the book value of net assets acquired because the recorded cost of Sales Company's land was significantly less than its fair value.
During 2014 Sales Company earned $148,000 and declared and paid a $50,000 dividend. Pert Company used the partial equity method to record its investment in Sales Company.
Required:
1. Prepare the investment-related entries on Pert Company's books for 2014.
2. Prepare the working paper eliminating entries for a working paper on December 31, 2014.

Answer 1

Answer and Explanation:

The journal entries are shown below:

a. For investment related entries

Investment in sales Dr $350,000

          To cash $350,000

(being the investment is recorded)

Investment in sales Dr ($148,000 × 85%) $125,800

          To Subsidiary income $125,800

(Being the investment in sales is recorded)

Cash Dr $42,500

      To Dividend income $42,500

(Being the dividend income is recorded)

b. For work paper eliminating entries

Equity income ($148,000 × 85%) $125,800

      To Dividend $42,500

      To investment in sales $83,300

(Being the equity income is recorded)

Common stock Dr $100,000

Other contributed capital Dr $40,000

Retained earnings Dr $140,000

Difference between implied and book value Dr $131,765 (Bal figure)

          To Investment in S Company $350,000

          To Non controlling interest $61,765  ($350,000 ÷ 0.85 × 0.15)

(Being the consolidated items are recorded)

Land Dr $131,765

         To Difference between implied and book value Dr $131,765

(Being the land is recorded)

Working note:

Particulars         Parent share    Non-conrolling interest   Total value

Purchase price

& implied value  $350,000       $61,765                            $411,765

Less:

Book value          -$238,000    -$42,000                          -$280,000

Difference

amount                $112,000          $19,765                           $131,765

Less:

Land value           -$112,000        -$19,765                         -$131,765

Balance                 $0                    $0                                  $0