Question

On January 1, 20X7, Pepper Company acquired 90 percent of the outstanding common stock of Salt 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 Salt. At the date of acquisition, Salt had common stock outstanding of $520,000, additional paid-in capital of $200,000, and retained earnings of $540,000. During 20X7, Salt sold inventory to Pepper for $440,000. The inventory originally cost Salt $360,000. By year-end, 30 percent was still in Pepper's ending inventory. During 20X8, the remaining inventory was resold to an unrelated customer. Both Pepper and Salt use perpetual inventory systems.

Income and dividend information for both Pepper and Salt for 20X7 and 20X8 are as follows:

Pepper Company							Salt 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

Assume Pepper uses the fully adjusted equity method to account for its investment in Salt.

Required:
a. Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X7.
b. Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X8.

Answer 1

Ans- Journal Entries for 2007 under Fully Adjusted Equity Method

E (1)	Income from subsidiary	302,400
	Dividends declared		180,000
	Investment in Smith		122,400
	$302,400=($360,000-$24,000)*.90
E (2)	Income to noncontrolling interest	33,600
	Dividends declared		20,000
	Noncontrolling interest		13,600
	$33,600=($360,000-$24,000)*.10
E (3)	Common stock-Smith	520,000
	Additional Paid in Capital	200,000
	Retained earnings January 1	540,000
	Differential	120,000
	Investment in Smith		1,242,000
	Noncontrolling Interest		138,000
E (4)	Land	120,000
	Differential		120,000
E (5)	Sales	440,000
	Cost of goods sold		416,000
	Inventory		24,000
	$416,000=($360,000*0.30)+($440,000*0.70)

b-Journal entries for 2008 under Cost Method:-

E (1)	Dividend Income	180,000
	Dividends Declared		180,000
E (2)	Income to noncontrolling interest	44,400
	Dividends declared		20,000
	Noncontrolling interest		24,400
	$44,400=($420,000+$24,000)*0.10
E (3)	Common Stock-Smith	520,000
	Additional paid in capital	200,000
	Retained Earnings January 1	540,000
	Differential	120,000
	Investment in Smith		1,242,000
	Noncontrolling interest		138,000
E (4)	Retained earnings January 1	16,000
	Noncontrolling interest		16,000
	$16,000=($360,000-$200,000)*0.10
E (5)	Land	120,000
	Differential		120,000
E (6)	Retained Earnings January 1	21,600
	Noncontrolling interest	2,400
	Cost of goods sold		24,000