Question

In: Accounting

On January 1, 2014, Petunia Company purchased an 85% interest im the captial stock of sunflower...

On January 1, 2014, Petunia Company purchased an 85% interest im the captial stock of sunflower Company for $3,400 (Cash + Shares of Petunia Company). Petunia Company uses the equity method to record its investment in Sunflower Company.

The plant is undervalued by 700 (7 year remaining life) and the equipment is overvalued by 200 (10 year remaining life) on January 1, 2014.

Prepare the journal entry to eliminate any income earned from Sunflower Corporation during 2014

Prepare the journal entry to eliminate Petunia's investment in Sunflower at December 31, 2014

Income statement Petunia Company Sunflower Company
Sales (4,400) (1,786)
Equity in Subsidiary Earnings (498)
Total Revenue (4,898) (1,786)
Cost of Goods Sold 3,600 800
Depreciation Expense 160 120
Other Expenses 240 200
Total Cost and Expenses 4,000 1,120
Separate/Consolidated Income (898) (666)
Noncontrolling Interest in Income
Net Income to Controlling Interest 898 666
Retained Earnings Statement
1/1 Retained Earnings (2,000) (920)
Net Income from above (898) (666)
Dividends Declared 360 226
12/31 Retained Earnings to Balance (2,538) (1,360)

Solutions

Expert Solution

Entries for elimination of profit

Equity in subsidiary earning's 498
             Investment in sunflower 498
(Eliminates the subsidiary Income (Equity Method) accrued by the parent.
Investment in sunflower 192
                    Dividend's Declared 192
( Eliminates the subsidiary Dividends.)

Entries for Elimination of Investment in Sunflower

Common Stock and Retained earnings 2975
Plant 595
          Equipment 170
          Investment in Sunflower 3400
( Being elimination of Subsidiary's Stockholder's Equity and the book value component within the parent Investment account also recognising unamortised allocations associated with adjustments of fair value for 85% share)

Since only 85% of shares are acquired, minority interest also needs to be accounted for 15% share.

Working Notes:

Equity Method
Purchase price paid 3400
Less: Income earned during the year 566
Less: Dividend received -192
Less: Amortisation -68
Closing balance of investment as per Equity Method 3,706

The entries to record the same would be

Minority Interest in earning's of sunflower 88
        Minority Interest in Net Assets in Sunflower 88

( Being recognizition of minority interest’s claim on earnings and net assets is as follows)

Also Depreciation needs to be provided for Plant adjusted for Equipment.

Equiment 20
Depreciation expense 80
     Plant 100
( Recognizes excess amortization Expenses for the current period on the allocations from the original adjustments to fair value)

ekkarill92 answered 2 years ago
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