Chapter 2 Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential 93

Required
a. Give the consolidation entry or entries needed to prepare a consolidated balance sheet immedi-
ately following the business combination.
b. Prepare a consolidated balance sheet worksheet.

LO 2-3, 2-7 E2-16 Consolidation Entries for Wholly Owned Subsidiary

Trim Corporation acquired 100 percent of Round Corporation’s voting common stock on January 1,
20X2, for $400,000. At that date, the book values and fair values of Round’s assets and liabilities
were equal. Round reported the following summarized balance sheet data:

Assets $700,000 Accounts Payable $100,000

Bonds Payable 200,000
Common Stock 120,000
Retained Earnings 280,000
Total $700,000 Total $700,000

Round reported net income of $80,000 for 20X2 and paid dividends of $25,000.
Required
a. Give the journal entries recorded by Trim Corporation during 20X2 on its books if Trim
accounts for its investment in Round using the equity method.
b. Give the consolidation entries needed at December 31, 20X2, to prepare consolidated financial
statements.

LO 2-3, 2-7 E2-17 Basic Consolidation Entries for Fully Owned Subsidiary
Amber Corporation reported the following summarized balance sheet data on December 31, 20X6:

Assets $600,000 Liabilities $100,000

Common Stock 300,000
Retained Earnings 200,000
Total $600,000 Total $600,000

On January 1, 20X7, Purple Company acquired 100 percent of Amber’s stock for $500,000. At
the acquisition date, the book values and fair values of Amber’s assets and liabilities were equal.
Amber reported net income of $50,000 for 20X7 and paid dividends of $20,000.
Required
a. Give the journal entries recorded by Purple on its books during 20X7 if it accounts for its
investment in Amber using the equity method.
b. Give the consolidation entries needed on December 31, 20X7, to prepare consolidated financial
statements.

PROBLEMS
LO 2-2, 2-3 P2-18 Retroactive Recognition
Idle Corporation has been acquiring shares of Fast Track Enterprises at book value for the last
several years. Fast Track provided data including the following:

20X2 20X3 20X4 20X5

Net Income $40,000 $60,000 $40,000 $50,000
Dividends 20,000 20,000 10,000 20,000
94 Chapter 2 Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential

Fast Track declares and pays its annual dividend on November 15 each year. Its net book value on
January 1, 20X2, was $250,000. Idle purchased shares of Fast Track on three occasions:

Percent of Ownership Amount

Date Purchased Paid
January 1, 20X2 10% $25,000
July 1, 20X3 5 15,000
January 1, 20X5 10 34,000

Required
Give the journal entries to be recorded on Idle’s books in 20X5 related to its investment in Fast
Track.

LO 2-4, 2-5 P2-19 Fair Value Method

Gant Company purchased 20 percent of the outstanding shares of Temp Company for $70,000 on
January 1, 20X6. The following results are reported for Temp Company:

20X6 20X7 20X8

Net Income $40,000 $35,000 $60,000
Dividends Paid 15,000 30,000 20,000
Fair Value of Shares Held by Gant:
January 1 70,000 89,000 86,000
December 31 89,000 86,000 97,000

Required
Determine the amounts reported by Gant as income from its investment in Temp for each year and
the balance in Gant’s investment in Temp at the end of each year assuming that Gant uses the fol-
lowing methods in accounting for its investment in Temp:
a. Cost method.
b. Equity method
c. Fair value method.

LO 2-5 P2-20 Fair Value Journal Entries

Marlow Company acquired 40 percent of the voting shares of Brown Company on January 1,
20X8, for $85,000. The following results are reported for Brown Company:

20X8 20X9
Net Income $20,000 $30,000
Dividends Paid 10,000 15,000
Fair Value of Shares Held by Marlow:
January 1 85,000 97,000
December 31 97,000 92,000

Required
Give all journal entries recorded by Marlow for 20X8 and 20X9 assuming that it uses the fair value
method in accounting for its investment in Brown.

LO 2-5 P2-21A Other Comprehensive Income Reported by Investee

Dewey Corporation owns 30 percent of the common stock of Jimm Company, which it purchased
at underlying book value on January 1, 20X5. Dewey reported a balance of $245,000 for its
 Chapter 2 Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential 95

investment in Jimm Company on January 1, 20X5, and $276,800 at December 31, 20X5. During
20X5, Dewey and Jimm Company reported operating income of $340,000 and $70,000, respec-
tively. Jimm received dividends from investments in marketable equity securities in the amount
of $7,000 during 20X5. It also reported an increase of $18,000 in the market value of its port-
folio of trading securities and an increase in the value of its portfolio of securities classified as
available-for-sale. Jimm paid dividends of $20,000 in 20X5. Ignore income taxes in determining
your solution.
Required
a. Assuming that Dewey uses the equity method in accounting for its investment in Jimm, com-
pute the amount of income from Jimm recorded by Dewey in 20X5.
b. Compute the amount reported by Jimm as other comprehensive income in 20X5.
c. If all of Jimm’s other comprehensive income arose solely from its investment in available-for-
sale securities purchased on March 10, 20X5, for $130,000, what was the market value of those
securities at December 31, 20X5?

LO 2-3, 2-7 P2-22A Equity-Method Income Statement

Wealthy Manufacturing Company purchased 40 percent of the voting shares of Diversified Prod-
ucts Corporation on March 23, 20X4. On December 31, 20X8, Wealthy Manufacturing’s controller
attempted to prepare income statements and retained earnings statements for the two companies
using the following summarized 20X8 data:

Wealthy Diversified
Manufacturing Products
Net Sales $850,000 $400,000
Cost of Goods Sold 670,000 320,000
Other Expenses 90,000 25,000
Dividends Declared & Paid 30,000 10,000
Retained Earnings, 1/1/X8 420,000 260,000

Wealthy Manufacturing uses the equity method in accounting for its investment in Diversified
Products. The controller was also aware of the following specific transactions for Diversified Prod-
ucts in 20X8, which were not included in the preceding data:
1. On June 30, 20X8, Diversified incurred a $5,000 extraordinary loss from a volcanic eruption
near its Greenland facility.
2. Diversified sold its entire Health Technologies division on September 30, 20X8, for $375,000.
The book value of Health Technologies division’s net assets on that date was $331,000. The
division incurred an operating loss of $15,000 in the first nine months of 20X8.
3. During 20X8, Diversified sold one of its delivery trucks after it was involved in an accident and
recorded a gain of $10,000.

Required
a. Prepare an income statement and retained earnings statement for Diversified Products for 20X8.
b. Prepare an income statement and retained earnings statement for Wealthy Manufacturing for
20X8.

LO 2-3, 2-6, P2-23 Consolidated Worksheet at End of the First Year of Ownership (Equity Method)
2-7 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
Snoopy as of December 31, 20X8, are as follows: