Chapter 4, Problem 4.36P

a.

To determine

Introduction: Investment is the asset that is acquired for the generation of income or return in the long run. Investments are used to create capital for future utilization. The return obtained from investments is used in operations of the business.

To prepare: Journal entries that Company J would record for investment in Company L.

Explanation of Solution

In the books of Company J:

Record of investment in Company L by equity method:

Date	Account	Debit ($)	Credit($)
20XX	Investment in Company L	203,000
	Cash		203,000
	(To record investment in Company L.)

Table (1)

• Investment in Company L is an asset and it is increased by $203,000. Therefore, Investment in Company L account is debited with $203,000.

• Cash is an asset and it is decreased by $203,000. Therefore, the Cash account is credited with $203,000.

Record of share income:

Date	Account	Debit ($)	Credit($)
20XX	Investment in Company L Common Stock	60,000
	Investment in Company L		60,000
	(To record share income.)

Table (2)

• Investment in Company L Common Stock is equity and it is decreased by $60,000. Therefore Investment in Company L Common Stock account is debited with $60,000.

• Investment in Company L is an asset and it is decreased by $60,000. Therefore, Investment in Company L account is credited with $60,000.

Record dividend income received:

Date	Account	Debit ($)	Credit($)
20XX	Cash	20,000
	Investment in Company L Common Stock		20,000
	(To record dividend income)

Table (3)

• Cash is an asset and it is increased by $12,000. Therefore, the cash account is debited with $12,000.

• Investment in Company L common stock is an asset and it is decreased by $12,000. Therefore, Investment in Company L common stock account is credited with $12,000.

Record equity-method income:

Date	Account	Debit ($)	Credit($)
20XX	Investment in Company L Common Stock	3,000
	Investment in Company L		3,000
	(To record equity-method income)

Table (4)

• Investment in Company L common stock is an asset and it is increased by $3,000. Therefore, Investment in Company L common stock account is debited with $3,000.

• Investment in Company L is income and it is increased by $3,000. Therefore, Investment in Company L account is credited with $3,000.

b.

To determine

Introduction: Investment is the asset that is acquired for the generation of income or return in the long run. Investments are used to create capital for future utilization. The return obtained from investments is used in operations of the business.

To prepare: Journal entries that Company W would record for consolidation to prepare a consolidated financial statement.

Explanation of Solution

Record of differential reclassification entry:

Date	Account	Debit ($)	Credit($)
20XX	Common stock	50,000
	Retained earnings	100,000
	Income from Company L	60,000
	Dividend		20,000
	Investment in Company BC		43,000
	(To record differential reclassification entry.)

Table (1)

• Common stock is equity and it is decreased by $50,000. Therefore, the common stock account is debited with $50,000.

• Retained earnings is equity and it is decreased by $100,000. Therefore, Retained earnings account is debited with $100,000.

• Investment in Company L is an asset and it is decreased by $60,000. Therefore, Investment in Company L account is credited with $60,000.

• Dividend income is income and it is increased by $20,000. Therefore, Dividend income account is credited with $20,000.

• Investment in Company L is income and it is increased by $43,000. Therefore, Investment in Company L account is credited with $43,000.

Record amortize differential related to equipment:

Date	Account	Debit ($)	Credit($)
20XX	Depreciation	3,000
	Income from Company L		3,000
	(To record amortize differential related to equipment)

Table (2)

• Differential is an expenses and it is increased by $3,000. Therefore, the differential account is debited with $3,000.

• Income from Company L is an income and it is increased by $3,000. Therefore, Income from Company L account is credited with $3,000.

Record elimination of inter-corporate receivable/ payable:

Date	Account	Debit ($)	Credit($)
20XX	Accounts Payable	16,000
	Accounts receivables		16,000
	(To record amortize differential)

Table (3)

• Accounts payable is a current liabilities and it is decreased by $16,000. Therefore, Accounts payable account is debited with $16,000.

• Accounts receivable is a current asset and it is decreased by $16,000. Therefore, Cash and receivables account is credited with $16,000.

Record elimination of depreciation:

Date	Account	Debit ($)	Credit($)
20XX	Accumulated Depreciation	60,000
	Building and Equipment		60,000
	(To record elimination of depreciation

Table (4)

• Accumulated depreciation is a current liability and it is decreased by $60,000. Therefore, the accumulated depreciation account is debited with $60,000.

• Building & Equipment is an asset and it is decreased by $60,000. Therefore, building & equipment account is credited with $60,000.

Working Notes:

1. Computation of original book value:

Particulars	Amount ($)
Common Stock (BV)	50,000
Retained Earnings (BV)	100,000
Original Book value	150,000

2. Computation of ending book value:

Particulars	Amount ($)
Original book value	150,000
Net income	60,000
Dividend	(20,000)
Ending Book value	190,000

c.

To determine

Introduction: Investment is the asset that is acquired for the generation of income or return in the long run. Investments are used to create capital for future utilization. The return obtained from investments is used in operations of the business.

To prepare: The three-part worksheet as of December 31, 20X5.

Explanation of Solution

Preparation of three-part worksheet:

Amount in ($)

Company J Consolidation Work paper December 31, 20X5
Particulars	Company J	Company L	Elimination		Consolidation
Income Statement			Debit	Credit
Sales	700,000	400,000			1,100,000
Cost of goods sold	(500,000)	(250,000)			(750,000)
Depreciation	(25,000)	(15,000)	3,000		(43,000)
Other expenses	(75,000)	(75,000)			(150,000)
Income from company L	57,000		60,000	3,000	0
Net Income	157,000	60,000	63,000	3,000	157,000
Statement of Retained earnings
Beginning balance	290,000	100,000	100,000		290,000
Net Income	157,000	60,000	63,000	3,000	157,000
Dividend Declared	(50,000)	(20,000)	20,000		(50,000)
Ending Balance	397,000	140,000	163,000	23,000	397,000
Balance Sheet
Cash	82,000	25,000			107,000
Accounts Receivables	50,000	55,000		16,000	89,000
Inventory	170,000	100,000			270,000
Land	80,000	20,000			100,000
Buildings and equipment	500,000	150,000	33,000	60,000	623,000
Accumulated Depreciation	(155,000)	(75,000)	60,000	3,000	(173,000)
Investment in Company L	240,000			190,000
Goodwill			20,000		20,000
Total assets	967,000	275,000	93,000	79,000	1,036,000
Accounts payable	70,000	35,000	16,000		89,000
Mortgage payable	200,000	50,000			250,000
Common stock	300,000	50,000	50,000		300,000
Retained earnings	397,000	140,000	163,000	23,000	397,000
Total liabilities	967,000	275,000	229,000	23,000	1,036,000

Table (1)