Question

Utes acquires 90% of Cougar on January 1st 20X1 for $810K (the underlying book value). At the time of the acquisition Cougar’s Retained Earnings was $400K and Common Stock was $500K. During the year, Ute sold $450,000 of inventory to Cougar. The inventory originally cost Ute $270,000. At the end of the year, Cougar had $90,000 of that inventory on hand. The remainder had been sold to an outside party. Including the sale of the intercompany inventory to an outside party, Cougar had net income of $250K and no dividends were paid during the year. At the date of acquisition Ute’s accumulated depreciation was $35K and Cougar’s was $25K. a- Ute accounts for Cougar under the fully adjusted equity method. Prepare all equity method adjustments that will be necessary for the entire year ending December 31, 20X1. b- Prepare all Elimination Entries at December 31, 20X1 c) What is the consolidated ending inventory at December 31st 20X1

Answer 1

	Equity method adjustment for the year ending December 31, 20X1
Date	Description	Debit	Credit
1 Jan 20X1	Investment in Cougar	$810,000
	Cash		$810,000
	(To record 90% acquisition of cougar company)
	Investment in Cougar	$225,000
	Income from Cougar		$225,000
	(To record 90% share of income from Cougar company for the year)
	Elimination Entries at December 31, 20X1
Date	Description	Debit	Credit
31 Dec 20X1	Common Stock	$500,000
	Retained Earning	$400,000
	Investment in Cougar		$810,000
	Non controlling interest		$90,000
	(To eliminate subsidiary's common stock and retained earnings)
31 Dec 20X1	Income from Cougar	$225,000
	Investment in Cougar		$225,000
	(To reverse the income from subsidiary)
31 Dec 20X1	Cost of goods sold	$36,000
	Inventory		$36,000
	(To reverse in unrealized gain from unsold inventory)
	Unrealized gain in unsold inventory in 20X1
	Selling price	$450,000
	Cost	$270,000
	Profit	$180,000
	Gross margin	40%
	Unsold Inventory	$90,000
	Unrealized gain in unsold inventory in 2017	$36,000
c	Consolidated ending inventory
	Need inventory values for both the Utes and Cougar
	Consolidated ending inventory = Ending Inventory of Utes + Ending inventory of Cougar - Unrealized gain in unsold inventory