On January 1, 20x7, Jones company acquired 90% of the outstanding common stock o

Question

On January 1, 20x7, Jones company acquired 90% of the outstanding common stock of Smith Corporation for $1,242,000. On that date, the fair value of noncontrolling interest was equal to $138,000. The entire differential was related to land held by Smith. At the date of acquisition, Smith had common stock outstanding of $520,000, Additional paid-in-capital of $200,000, and retained earnigs of $540,000. During 20x7, Smith sold inventory to Jones for $440,000. The inventory originally cost Smith $360,000. By year-end, 30% was still in Jones' ending inventory. During 20x8, the remaining inventory was resold to an unrelated customer. Both Jones and Smith used perpetual inventory systems. Income and Dividend information for both Jones and Smith for 20x7 and 20X8 are as follows: Assume Jones uses the equity method to account for its investment in Smith Required:

A. Present the worksheet elimination entries necessary to prepare consolidated financial statements for 20X7.

B. Present the worksheet elimination entries necessary to prepare consolidated financial statements for 20X8.

C. Compute consolidated Net Income and the allocation of income to the controlling and non-controlling interests.

Jones Company Smith Corp. Operating Income Dividends Net Income Dividends 20X7 $860,000 $160,000 $360,000 $200,000 20X8 910,000 200,000 420,000 200,000

Explanation / Answer

worksheet elimination entries necessary to prepare consolidated financial statements for 20X7

Smith sold inventory to Jones for $440,000.

The inventory originally cost to Smith = $360,000

Closing inventory of jones = 30% * 440000 = 132000

unrealised profit in closing stock = 24000

Elimination of unrealised profit = 1) reduce value of inventory 2) reduce profit in appropiation of profit

value of closing stock = 132000 - 24000 = 108000

Profit and loss account Dr. 24000

TO inventory 24000

Elimination entries necessary to prepare consolidated financial statements for 20X8

Inventory dr . 24000

to profit and loss account 24000

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