Chapter 2, Problem 2.21P

Consolidated Worksheet at End of the First Year of Ownership (Equity Method)
Peanut Company acquired 100 percent of Snoopy Company’s outstanding common stock for
$300,000 on January 1, 20X8, when the book value of Snoopy’s net assets was equal to $300,000.
Peanut uses the equity method to account for investments. Trial balance data for Peanut and Snoopyas of December 31, 20X8, are as follows:
  
Required
a. Prepare the journal entries on Peanut’s books for the acquisition of Snoopy on January 1, 20X8, as well as any normal equity-method entry(ies) related to the investment in Snoopy Company during 20X8.
b. Prepare a consolidation worksheet for 20X8 in good form.

To determine

Introduction:

The consolidated balance sheet and the worksheets are the computed tools that are used to calculate the retained earnings and the dividend produced by the subsidiaries towards its parent company.

To prepare: A journal entry by equity method for the investment in S company in the year $2008$ .

Answer to Problem 2.21P

The journal entry so passed gives a debit of investment and credit the cash with the same amount.

Explanation of Solution

Particular	Debit	Credit
Equity method entry on books
Investment in S co.	$300,000$
Cash		$300,000$
(Record P co. $100\%$ share of the S co. $2009$ income)
Cash	$20,000$
Investment in the S co.		$20,000$
(Record P co. share in S co. dividend)
Investment in S	75000
Income from S		75000
(To record P share in S income )

To determine

Concept introduction

The consolidated balance sheet and the worksheets are the computed tools that are used to calculate the retained earnings and the dividend produced by the subsidiaries towards its parent company.

To prepare: The consolidated worksheet for the final values

Explanation of Solution

Book value calculation
	Total book value	=	Common stock	+	Retained earnings
Book value	$300,000$		$200,000$		$100,000$
Net income	$75,000$				$75,000$
Dividend	$20,000$				$20,000$
Ending book value	$355,000$		$200,000$		$155,000$

Income statement	P	S	Dr.	Cr.	consolidated
Sales	$800000$	$250000$			$1050000$
Less Cogs	$\left(200000\right)$	$(125000)$			$(325000)$
Depreciation Exp	$(50000)$	$(10000)$			$(60000)$
Sel. Exp	$(225000)$	$(40000)$			$(265000)$
Income	$75000$		$75000$
Net income	$400000$	$75000$	$75000$		$400000$

Statement of Retain Earning	P	S	Dr.	Cr.	Consolidated
Opening balance	$225000$	$100000$	$100000$		$225000$
Net income	$400000$	$75000$	$75000$		$400000$
Less dividend declared	$(100000)$	$(20000)$		$20000$	$100000$
End balance	$525000$	$155000$	$175000$	$20000$	$525000$

Income statement	P co	S co	Eliminated DR	Eliminated CR	consolidated
Cash	$130,000$	$80,000$			$210,000$
Accounts received	$165,000$	$65,000$			$230,000$
Inventory	$200,000$	$75,000$			$275,000$
Investment in S co	$355,000$	$$		$355,000$	$0$
Land	$200,000$	$100,000$			$300,000$
Building and equipment	$700,000$	$200,000$		$10,000$	$890,000$
Less accumulated depreciation	$450,000$	$20,000$	$10,000$		$460,000$
Total assets	$1,300,000$	$500,000$	$10,000$	$365,000$	$1,445,000$
Account payable	$75,000$	$60,000$			$135,000$
Bonds	$200,000$	$85,000$			$285,000$
Common stocks	$500,000$	$200,000$	$200,000$		$500,000$
Retained earnings	$525,000$	$155,000$	$175,000$	$20,000$	$525,000$
Total liabilities	$1,300,000$	$500,000$	$375,000$	$20,000$	$1,445,000$