On January 1, 2018, Sledge had common stock of $250,000 and retained earnings of

Question

On January 1, 2018, Sledge had common stock of $250,000 and retained earnings of $390,000. During that year, Sledge reported sales of $260,000, cost of goods sold of $135,000, and operating expenses of $53,000.

On January 1, 2016, Percy, Inc., acquired 80 percent of Sledge's outstanding voting stock. At that date, $73,000 of the acquisition-date fair value was assigned to unrecorded contracts (with a 20-year life) and $33,000 to an undervalued building (with a 10-year remaining life).

In 2017, Sledge sold inventory costing $16,800 to Percy for $28,000. Of this merchandise, Percy continued to hold $7,000 at year-end. During 2018, Sledge transferred inventory costing $18,150 to Percy for $33,000. Percy still held half of these items at year-end.

On January 1, 2017, Percy sold equipment to Sledge for $18,500. This asset originally cost $29,000 but had a January 1, 2017, book value of $11,600. At the time of transfer, the equipment's remaining life was estimated to be five years. Percy has properly applied the equity method to the investment in Sledge.

a. What is the Equity in Income of Sledge for 2018? Prepare worksheet entries to consolidate these two companies as of December 31, 2018.

Explanation / Answer

Account Head Debit Credit Retained Earning              2,800 Cost of Goods Sold              2,800 Equipment            10,500 Investment in Sledge              5,520        Accumulated Depn            16,020 Common Stock (Sledge)          250,000 Retained earning (1/1/18) adjusted-Sldege          387,200 Investment in Sledge          509,760 Non-controlling in Sledge-1/1/18 Contracts            65,700 Buildings            26,400 Investment in Sledge            73,680 Non controlling in Sledge-1/1/18            18,420 Equity Income of subsidiary            51,660 Investment in Sledge            51,660 Depreciation Expenses              3,300 Amortization Expenses              3,650 Contracts              3,650 Buildings              3,300 Sales            33,000 Cost of Good Sold            33,000 Cost of Goods Sold              7,425 Inventory              7,425 Accumulated Depn              1,380 Depn Expenses              1,380 Working Notes Cost price Sale price Profit ratio Ending inventory Csot price Profit in inventory 01/01/2018            16,800            28,000 1.666667 7000 4200 2800 31/12/2018            18,150            33,000 1.818182 16500 9075 7425 equipment 80% Cost price Sale price Profit from cost Book Value Profit from Book Value Acquistion Holdin share Total accumulated Depn            29,000            18,500      10,500      11,600         6,900 80%         5,520      16,020 Equity   Retained earning Adjust of op invent. Total 80% 20%          250,000          390,000 2800 387200 637200 509760 77440 Assets unrecorded life Depn pa Depn for two years WDV 1/1/18 Contracts            73,000                    20 3650         7,300      65,700 Building            33,000                    10 3300         6,600      26,400 Profit Earned Invent. Cost price 80% retaned            72,000              7,425 64575 51660 Depn Book Value Sale price Profit Depn            11,600            18,500 6900 1380

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