Answered: Martinez’s journal entries

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

On January 7, 2020, Martinez Corporation purchased 30% of the outstanding voting common stock of Paulson Company for $650,000. This purchase gave Martinez the ability to exercise significant influence over the operating and financial policies of Paulson. On the date of purchase, Paulson’s books reported assets of $2,300,000 and liabilities of $870,000. Any excess of cost over book value of Martinez’s investment was attributed to a patent with a remaining useful life of nine years. During 2020, Paulson reported net income of $350,000 and declared and paid cash dividends of $70,000. In the following year, 2021, Paulson reported net income of $390,000 and declared and paid cash dividends of $112,000. In 2020, Martinez sold inventory costing $70,000 to Paulson for $85,000. Paulson sold 80% of that inventory to outsiders during 2020 with the remainder being sold in 2021. During 2021, Martinez sold inventory costing $110,000 to Paulson for $130,000. Paulson sold 80% of that inventory to outsiders during 2021. Prepare all of Martinez’s journal entries for 2020 to apply the equity method.

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