In: Accounting
Problem I. On January 1, 2019, P Corp acquired 80% of the outstanding common stock of S Corp for $820,000 cash. On that date, S Company’s stockholders’ equity consisted of common stock, $150,000; other contributed capital, $200,000; and retained earnings, $350,000. P Corp paid more than the book value of net assets acquired because the recorded cost of S Corp’s equipment (5 year remaining useful life) was $40,000 less than its fair value; the remainder was allocated to goodwill. There were acquisition related costs of $40,000 at the date of acquisition.
During 2019 S Corp earned $240,000 and declared and paid a $80,000 dividend. P Corp used the equity method to record its investment in S Corp. In addition, P Corp sold (transferred) $100,000 of goods to S Corp on account. The goods cost P Corp $60,000. At the end of 2019, approximately $20,000 of the transfer remains unsold.
During 2020 S Corp earned $280,000 and declared and paid a $90,000 dividend. The unsold goods from 2019 were all sold to 3rd parties. In addition, P Corp. sold (transferred) $120,000 of goods to S Corp on account. The goods cost P Corp $90,000. At the end of 2020, approximately $30,000 of the transfer remains unsold.
1-. Prepare the journal entries on P Corp’s books to record S Corp’s income and dividends during 2020, as well as any other necessary journal entries during the year.
2-Prepare the worksheet entries at December 31, 2020
Date | Particulars | Debit $ | Credit $ |
31-12-2020 | Investment in S Corp account | $224,000 | |
Share of Income from S Corp account | $224,000 | ||
(80% of income received from S Corp i.e. | |||
80% of $2,80,000 recognised as income) | |||
31-12-2020 | Cash | $ 72,000 | |
Investment in S Corp account | $ 72,000 | ||
(80% of dividend $90,000 received from | |||
S Corp recognized) | |||
31-12-2020 | Investment in S Corp account | $ 6,400 | |
Share of Income from S Corp account | $ 6,400 | ||
(Gross profit on unsold goods at the end of | |||
2019 which was unrealized at that time and | |||
realized in 2020 after-sale to 3rd parties | |||
recognized. $20,000* 40% GP * 80% share) | |||
31-12-2020 | Share of Income from S Corp account | $ 6,000 | |
Investment in S Corp account | $ 6,000 | ||
(Unrealized gross profit on $30,000 sales to | |||
S Corp which remained unsold on year-end | |||
reversed $30,000* 25% GP* 80% share) |
Investment in S Corp account | |||||
31-12-2020 | Share of Income from S Corp account | $224,000 | 31-12-2020 | Cash | $ 72,000 |
31-12-2020 | Share of Income from S Corp account | $ 6,400 | 31-12-2020 | Share of Income from S Corp account | $ 6,000 |
31-12-2020 | Balance c/f | $152,400 | |||
$230,400 | $230,400 | ||||
Share of Income from S Corp account | |||||
31-12-2020 | Investment in S Corp account | $ 6,000 | 31-12-2020 | Investment in S Corp account | $224,000 |
31-12-2020 | Balance c/f | $224,400 | 31-12-2020 | Investment in S Corp account | $ 6,400 |
$230,400 | $230,400 | ||||
Cash Account | |||||
31-12-2020 | Investment in S Corp account | $ 72,000 | 31-12-2020 | Balance c/f | $ 72,000 |